The Reserve Bank of India may relax the rules on companies hedging their commodity positions in international markets.
At present, companies and traders have to take permission from the central bank before hedging their underlying positions in international markets and are allowed to hedge in overseas markets only those commodities (oil and coffee, to name but two) that are not traded on local commodity exchanges.
However, companies with good credentials may be given a limit on the basis of their turnover up to which they can hedge on overseas commodity exchanges automatically and then report this to the RBI.
This is one of the recommendations made by an internal committee of the RBI on the foreign exchange market.
The committee's recommendations, if implemented, could see a slew of changes in the market, ranging from relaxations for importers in hedging their long-term obligations beyond one year to strengthening risk management in the foreign exchange market.
Some of the recommendations may find a place in the annual credit policy to be announced by the central bank next week, according to market sources.
At present, an importer cannot rebook a forward contract maturing in more than a year after cancelling it -- something that exporters can. But importers may now be allowed to cancel and rebook forward contracts maturing in more than a year.
Import payments are usually made in 3-5 years in the case of capital goods. 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.
Indeed, the RBI proposes to recommend to the Institute of Chartered Accountants of India that its draft uniform accounting norms for options and futures so that the market risk of a bank on its corporate client could be gauged properly.
The committee has also made sweeping recommendations to develop the derivatives market for better risk management.
At present, companies are only allowed to buy currency options for hedging their positions. (Currency options allow a company to swap its position in one currency into another to avoid fluctuations).
They may now be allowed to sell options too. This will widen the market, by bringing in more participants and help in market making. Moreover, the committee wants a clarification of the legal status of the derivatives instrument which is not covered by the Securities Contract Regulation Act.
Making life easier
Importers will be allowed to rebook a forward contract maturing in more than a year after cancelling it.
Companies with good credentials may be given a ceiling on the basis of their turnover, up to which they can hedge on overseas commodity exchanges and then report this to the RBI.
At present, companies have to take permission from the central bank before hedging their underlying positions in international markets.