Indians Permitted to Hedge Gold Price Risk Overseas Markets (GS Paper 3, Indian Economy)
Why in news?
- Reserve Bank of India (RBI) has allowed Indian residents to hedge their gold price risk on recognised exchanges in the International Financial Services Centre (IFSC).
- Governor Shaktikanta Das announced the decision during the Monetary Policy Committee (MPC) meeting where the repo rate was increased by 35 basis points to 6.25 per cent.
What is Gold Hedging?
- In the context of business, particularly in the gold industry, hedging is a strategy used to minimize the risk of potential losses due to fluctuations in the market price of gold.
- Gold producers, traders, and investors may employ various hedging techniques to protect themselves against adverse price movements and ensure a more stable cash flow.
Examples of hedging strategies in the gold business include:
Forward contracts
- A gold mining company might enter into a forward contract, agreeing to sell a specific amount of gold at a predetermined price on a future date. This locks in the selling price, providing protection against a potential drop in gold prices.
Options
- Gold traders can purchase put options, giving them the right, but not the obligation, to sell gold at a specific price (strike price) by a certain date. This helps limit potential losses if gold prices fall below the strike price.
Futures contracts
- Gold investors can buy or sell gold futures contracts, which are agreements to purchase or sell a specific amount of gold at a predetermined price on a future date. Futures can be used to hedge against price volatility and manage risk.
Current Rule on Gold Hedging
- Prior to this approval, resident entities in India were not permitted to hedge their exposure to gold price risk in overseas markets.
- This new decision by the RBI opens opportunities for Indian residents to hedge their positions against price fluctuations in global markets.
Benefits of Gold Hedging for Indian Residents
- The approval to hedge gold on recognised exchanges in the IFSC will benefit Indian residents, particularly those involved in the gold import and export industry.
- By being able to hedge their gold price risk, players in the industry can protect themselves against unfavourable price movements and currency fluctuations.
- This approval is also expected to increase price competitiveness in the Indian jewellery industry, as it enables businesses to manage their exposure to gold prices more effectively.
