RBI Allows Residents To Hedge Against Gold Price Risk Using OTC Derivatives

The Reserve Bank of India has allowed further flexibility to residents who are looking to hedge their gold exposure against price risk volatility in the overseas market, it said in a press release on Monday. Residents can hedge their gold exposure using rupee derivatives in the over-the-counter segment in the International Financial Services Centre at GIFT City.

"This will provide resident entities more flexibility and easier access to derivative products in hedging their exposure to gold prices," the RBI said in its Statement on Developmental and Regulatory Policies on Feb. 8.

Until now, eligible resident entities could hedge their exposure to the price risk of gold on exchanges in the IFSC.

These instructions come into effect immediately.

On Monday, according to CME Group, the most-traded gold futures contract for June traded at $2,372.1 per ounce, as compared with $2,069 per ounce at the beginning of 2024.

On Monday, the rally was supported by safe-haven demand amid ongoing conflict in the Middle East. Over the last three months, prices of the yellow metal have risen nearly 15% on the back of robust buying by central banks across the world in the past few months, according to analysts.

"The fundamentals underpinning the current rally include growing geopolitical risk, steady central bank buying and resilient demand for jewellery and bars and coins," the World Gold Council said in its monthly review of March on Monday.

Going forward, demand from Indian consumers is expected to remain subdued in June, all else being equal, as India nears election season in April, according to the World Gold Council. However, geopolitical risks as well as continued demand from central banks are likely to push gold prices higher.

The RBI has been accumulating gold in its coffers persistently over the last few years. The latest data shows that the RBI's gold holdings stood at $54.5 billion as of April 5, mopping up gold worth $6.2 billion since the beginning of 2024.

The central bank is said to have been diversifying its foreign currency assets, as gold acts as a natural hedge against inflation and currency risks. "We are building up gold reserves; the data is released from time-to-time," said RBI Governor Shaktikanta Das at the post-policy media conference on April 5. "All aspects while building up the reserves are assessed and then we make a decision."

Amid volatility in the US dollar in recent times, gold is perceived as a stable asset in times of global uncertainty and geopolitical risks, experts said.