The decision will benefit gold importers and exporters and is expected to help increase the price competitiveness of the Indian jewellery industry.
“The RBI’s approval to hedge gold at the IFSC is a major enabler for gold importers and exporters using yellow metal as the primary raw material for production,” said Colin Shah, managing director of Mumbai-based Kama Jewellery and a former chairman of the Gem & Jewellery Export Council. “It will help players hedge their positions against price fluctuations and unfavourable currency movement. This will also lead to an increase in volumes and activities at the IFSC.”
At present, traders hedge gold in rupees but with this new RBI directive, they can do so in dollars in international exchanges located at the IFSC.
India is the world’s second biggest consumer and importer of gold, buying about 800-850 tonnes per annum. The country accounts for a quarter of the world’s gold demand.
“This is for the first time that the RBI has allowed hedging of gold outside India,” said Ashok Kumar Gautam, managing director and CEO of the India International Bullion Exchange (IIBX).
The IIBX, located in the IFSC, was launched in July this year . It was set up to facilitate efficient price discovery and ensure standardisation, quality and sourcing integrity. The exchange allows qualified jewellers access to import gold directly, instead of buying the metal from banks and authorised agencies.
The exchange has 75 qualified jewellers as of now and 35 more are in pipeline, Gautam said. “They will be able to hedge gold in the IIBX in dollar denomination. We are also planning to launch gold futures and gold option contracts soon.”
The jewellers will have to step up risk management and treasury processes at their end. “Both domestic jewellers and exporters will benefit from today’s RBI announcement. At present, jewellers take gold bars from banks and nominated agencies, convert them into jewellery and then send them to the shop. The entire process may take anywhere between 30 and 90 days. The jeweller has paid for the gold, but he has to wait to recover the money. The hedging mechanism will help him in better price discovery,” Gautam said.
The biggest gold consumer, China, runs a bourse similar to the IIBX where all domestic production and imported gold have to be bought and sold. Established along the lines of the Shanghai Gold Exchange and Borsa Istanbul, India’s bullion exchange is aimed at making the country a key regional hub for bullion flows.