What changed
Previously, resident entities in India were barred from hedging gold price risk in overseas markets. Now, RBI has allowed eligible entities to hedge this risk on exchanges in the International Financial Services Centre (IFSC) recognized by the IFSCA. The change was announced via a circular dated December 12, 2022, following the bi-monthly monetary policy statement.
What it means for you
Banks and their clients can now use IFSC-based exchanges to manage gold price exposure, reducing reliance on domestic hedging avenues. This opens a new channel for gold price risk management, potentially lowering costs and increasing flexibility for eligible entities. Lenders must update their compliance frameworks to align with the new Master Direction issued on the same date.
What you must do
- Review the new Master Direction on hedging commodity price risk and freight risk in overseas markets issued on December 12, 2022.
- Update internal policies to permit eligible clients to hedge gold price risk on IFSC exchanges.
- Ensure all hedging transactions comply with FEMA provisions under Sections 10(4) and 11(1).
- Train staff on the revised eligibility criteria and documentation requirements for gold hedging.
Who it affects
Authorised Dealer Category – I Banks, Resident entities with gold price exposure, IFSC exchanges and clearing houses
Can all resident entities now hedge gold price risk overseas?
No, only eligible entities as defined in the new Master Direction can hedge on IFSC exchanges recognized by IFSCA. The circular does not specify all eligibility criteria, so refer to the Master Direction.
Does this circular replace the 2018 hedging directions?
Yes, the 2018 directions are superseded by the new Master Direction issued on December 12, 2022, which incorporates this change.
What legal basis does this circular have?
It is issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999, and does not override other applicable laws.