Banks to have a say in commodity hedging proposals

ANNUAL POLICY 2005-06/ FOREX MARKET

The Reserve Bank of India's (RBI) credit policy has suggested that banks should be allowed to approve proposals for commodity hedging in the international exchanges from their corporate customers.

Further, the forex market committee instituted by the RBI recommended that the corporations could hedge their economic risk in respect to their domestic operations arising out of the changes in the landed cost of the imported substitutes of the commodities they consume or produce.

At present, companies and and traders can hedge their risks arising only from their imports and exports and have to take permission from the central bank before hedging their underlying positions in international markets.

Under the new recommendations, companies with good creditworthiness would be given a cap on their turnover and they will be allowed to hedge up to that level on the commodity exchanges overseas automatically and then report to the RBI.

Currently, an importer cannot rebook a forward contract maturing in more than a year after cancelling it which would now be permitted. A forward contract is booked by an importer or exporter to hedge their import payments or export receivables at a set rate decided on a prior date to avoid the risks of currency fluctuations in the international market.

The sequencing with regard to implementation of these measures will take into account the enabling conditions for progress towards capital account convertibility, liberalisation in other sectors of the economy and the trend in overall balance of payments.