News Excerpt:

The Reserve Bank of India (RBI) has introduced a significant policy amendment, enabling residents to diversify their hedging strategies against gold price volatility in overseas markets.

More about the news:

• With growing geopolitical tension in the Middle East, gold prices are skyrocketing and are expected to surpass $2700 per ounce this year.
• RBI has now decided to give resident entities more flexibility to hedge their exposures to gold price risk.
• Resident entities are now allowed to do so with OTC derivatives in the IFSC in addition to derivatives on the IFSC exchanges, effective immediately.
• These derivatives can be used alongside the existing exchange-traded derivatives, adhering to the stringent guidelines outlined by RBI.
• The updated hedging regulations take effect immediately
• Previously, as per the RBI’s December 2022 directive, Indian entities were restricted to managing their gold price risk exclusively through exchanges recognized by the International Financial Services Centres Authority (IFSCA) in the International Financial Services Centre (IFSC). 
• The move aims to ensure that entities have a broader range of strategies at their disposal to manage potential losses caused by fluctuations in gold prices.

Hedging:

• Hedging refers to the practice of reducing or mitigating the risk of adverse price fluctuations in assets. 
• It involves taking a position in a financial instrument that is opposite to an existing or anticipated position in another asset, with the aim of offsetting potential losses.