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𝐑𝐁𝐈 𝐞𝐚𝐬𝐞𝐬 𝐫𝐮𝐥𝐞𝐬 𝐟𝐨𝐫 𝐫𝐞𝐬𝐢𝐝𝐞𝐧𝐭 𝐞𝐧𝐭𝐢𝐭𝐢𝐞𝐬 𝐭𝐨 𝐡𝐞𝐝𝐠𝐞 𝐭𝐡𝐞𝐢𝐫 𝐠𝐨𝐥𝐝 𝐩𝐫𝐢𝐜𝐞 𝐫𝐢𝐬𝐤 𝐭𝐡𝐫𝐨𝐮𝐠𝐡 𝐎𝐓𝐂 𝐝𝐞𝐫𝐢𝐯𝐚𝐭𝐢𝐯𝐞𝐬 𝐢𝐧 𝐈𝐅𝐒𝐂

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The Reserve Bank of India (RBI) yesterday, issued a circular, with immediate effect, to allow resident entities to hedge the price of gold in the Over the Counter (OTC) segment in the IFSC. Earlier in December 2022, Reserve Bank of India (RBI) had allowed the resident entities to hedge their exposure to the price risk of gold on the exchanges in the IFSC that are recognised by the International Financial Services Centres Authority (IFSCA).

𝐖𝐡𝐲 𝐇𝐞𝐝𝐠𝐞 𝐆𝐨𝐥𝐝 𝐏𝐫𝐢𝐜𝐞 𝐑𝐢𝐬𝐤?

Hedging is an activity of undertaking a derivative transaction to reduce an identifiable and measurable risk. The price of gold is generally affected by drivers such as value of the USD, market volatility, gold production, reserves, jewellery demand, etc. The hedging of gold price risk is likely to be useful to industry players and jewellers who use gold as an end product. Further, many traders and investors consider gold to be a hedge against inflation as gold is dollar denominated. Therefore, a stronger USD keeps the price of gold lower and more controlled, while a weaker USD drives the gold price higher due to increasing demand. Thus, more gold can be purchased when the dollar is weak. Similarly, hedging is also done to minimise the risk of one asset class vis-à-vis another asset class, such as falling stock market nudging hedgers to take exposure in gold derivatives.

Further, Master Direction – Foreign Exchange Management (Hedging of Commodity Price Risk and Freight Risk in Overseas Markets) Directions, 2022 which consist of directions to all Authorised Dealers Category-I Banks (AD Cat-I Banks) has been updated accordingly. As per Clause 7 (ii) of the Master Direction, OTC contracts shall be booked with a bank or with a non-bank entity which is permitted to offer such derivatives by their regulators. For this purpose, a list of acceptable jurisdictions shall be specified by Foreign Exchange Dealers Association Of India (FEDAI).

With projections indicating robust growth for the Indian economy until 2030, it becomes imperative to assess whether such policies implemented by regulatory bodies such as Reserve Bank of India (RBI), SEBI, and International Financial Services Centres Authority (IFSCA) will facilitate increased liquidity and accelerate growth. Commodity Derivatives whether in IFSCA or outside IFSCA, itself, is a very nascent and growing market. Further, the country’s OTC derivatives market is also relatively small, and the introduction of additional liquidity policies tailored for the derivatives segment could enable entities in securing financing at best rates while effectively managing risks.

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