Allow exporters to hedge in global comexes.

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has suggested the Government to permit the exporters operating out of India having an open position without back-up export/import contracts to hedge in international exchanges as the products are linked to international commodity markets.

In a note submitted to the government, the Chamber has stated that as per the Reserve Bank of India (RBI) guidelines, corporates are allowed to hedge in the international commodity exchanges only if the position is backed by export/import contracts. Exporters of agri commodities need to purchase raw material stocks during the season in anticipation of future export orders.

Export orders, however, will be received round the year and, therefore, the exporter who wishes to cover his domestic raw material purchases for export purposes against fluctuating prices in international market which also drive domestic prices does not have an option to hedge on international commodity exchanges.

The RBI mandates that hedging on international commodity exchanges is permitted only against an export contract in the hands of the exporter. As a result, the exporter is subjected to price risk till the time he obtains an export order for his product.

ASSOCHAM has, therefore, recommended that exporters operating out of India having an open position without back-up export/import contracts should be allowed to hedge in international exchanges since the products are linked to international commodity markets and may provide better correlation and consequent opportunities to mitigate their price risks at better rates.

It has also suggested that commodity exchanges operating under the Forward Markets Commission (FMC) guidelines should allow to provide an additional risk mitigation tool to the hedgers as is available in the currency markets.

Currently, a limit of 80,000 MT is imposed by domestic commodity exchanges as per the directive of the FMC on the quantity of Soyabean that can be hedged by the members, whether acting in their own capacity of 60,000 MT or on behalf of the clients’ 20,000 MT.

“This limit is enforced notwithstanding the fact that member needs to deposit margin money on the value of the commodity hedged at the rates specified by the exchange”, said the ASSOCHAM spokesman.

Established players in the industry who buy large quantity of physical stocks directly from the farmers and support the market stabilization are left exposed to price risk with no option to hedge the same on exchange beyond the specified limits. ASSOCHAM has also recommended that FMC should permit hedging of Soyabean stocks on the commodity exchange without any limits provided that such hedge is backed up by physical stocks and the physical stocks are bought directly from the farmers.

In a separate note, the chamber has stated that under the subsidy scheme for ‘Development/Strengthening of Agricultural Marketing Infrastructure, grading and standardization and/or rural godown’, the maximum subsidy possible is limited to an amount of Rs. 50 lakhs. This discourages quality infrastructure development. In order to increase creation of quality rural infrastructure, this cap on the amount of subsidy can be removed so as to encourage faster development and also build infrastructure with economics of scale, which will increase the competitiveness of agri commodities business.

Source : www.commodityonline.com