RBI disallows hedging of price risk in gold, gems and precious stones

The Reserve Bank of India has revised its directions on ‘Hedging of Commodity Price Risk and Freight Risk in Overseas Markets’, whereby it has excluded gold, gems and precious stones from the list of commodities whose price risk can be hedged.

This development comes in the backdrop of the ₹12,600-crore letter of undertaking (LoU) scam at Punjab National Bank involving fraudulent issue of LoUs by a couple of officials in one of its Mumbai branches in favour of companies in the gems and jewellery trade.

Hedging is the activity of undertaking a derivative transaction to reduce an identifiable and measurable risk.

Under the new directions, commodities whose price risk can be hedged in the case of direct exposure include all commodities except gold, gems and precious stones. Commodities whose price risk can be hedged in the case of indirect exposure are: aluminum, copper, lead, zinc, nickel, and tin.

The RBI said the revised directions shall come into force from April 1, 2018.

Story credit: Business Line