Mumbai: The Reserve Bank of India (RBI) Friday released draft norms for Indian companies to hedge their commodities exposure from fluctuating prices in overseas markets.
Apart for allowing eligible companies to hedge their direct exposure, the central bank has proposed to introduce a facility of hedging indirect price risk for select metals.
Hedging is an activity which involves a derivative transaction to minimise certain identified risks.
According to the draft norms, an eligible entity’s exposure is termed direct if it transacts in commodities whose prices are fixed by reference to an international benchmark or is defined by a formula. Indirect exposure is that where prices of commodities are not linked to a reference benchmark or formula.
Hedging of price risk is proposed to be allowed for all commodities in case of direct exposure. In case of indirect exposure, hedging is allowed for aluminium, copper, lead, zinc, nickel, and tin. This list would be reviewed annually, the draft said.
The RBI also said banks can permit eligible entities to hedge commodity price risk overseas using permitted instruments subject to certain conditions.
The central bank has sought comments on the draft by the end of January.