Page 19 - Bullion World Volume 04 issue 12 December 2024

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A major breakthrough occurred on February 9, 2024, on one side offset gains on the other, discourages many
when the Reserve Bank of India (RBI) allowed Indian entities from adopting legal and formal hedging practices.
banks to participate in the GIFT-IFSC exchange Addressing this knowledge gap requires concerted efforts
ecosystem. This decision opened new avenues for banks from regulators, tax authorities, and market participants
to contribute as Trading Members and Special Category to better understand the dynamics of hedging and its
Clients (SCC). Specifically, International Banking Units benefits.
(IBUs)—branches of Indian banks operating at GIFT-
IFSC—were permitted to join IIBX as Trading Members. As awareness and understanding grow, the exchange is
Simultaneously, nominated banks authorized by the RBI expected to see a surge in derivatives trading volumes.
to import gold and silver were given the status of SCCs. The introduction of liquidity providers and market makers
This move is expected to bring in substantial liquidity and will further enhance activity on the platform, enabling
drive growth in trading volumes on the exchange. India to play a more significant role in price discovery.
This transition will mark a shift from the current scenario,
where only one-way buy trades dominate, toward a more
The next growth phase for the exchange is balanced and dynamic market.
expected to be driven by the participation
of Indian banks. The cumulative volumes of
imports by nominated banks in F.Y 2024-25 Looking ahead, the exchange must look
(till October 2024) is estimated to be around to launch T+2 contracts for importers
180 tonnes under the consignment model. It once the regulatory enablers are in place.
is further estimated that their annual volumes These contracts are expected to become
may be around 250 tonnes. Their participation a major driver of physical trade volumes,
is likely to bring in large-scale transaction further solidifying GIFT-IFSC's position as
ticket size, such as 50 kg or 100 kg deals, which a global bullion trading hub. Additionally,
can further elevate the stature of the exchange the International Financial Services Centres
if a part of the additional 70 tonnes of the Authority (IFSCA) is anticipated to introduce
estimated volume flows largely come through Bullion Good Delivery Guidelines focused
the exchange mechanism. This development on responsible sourcing and supply chain
underscores the complementary relationship integrity. These guidelines will encourage
between IIBX and Indian banks. While global refiners to adopt responsible sourcing
banks have traditionally operated through principles, aligning with international best
consignment models, their participation in practices.
IIBX enhances liquidity and transaction flows,
creating mutual value for both entities.
India’s expertise in large-scale audits and compliance
processes can play a crucial role in the successful
implementation of these guidelines. By emphasizing
On the derivatives front, trading activity remains relatively
low due to several challenges. Lack of liquidity, coupled proper documentation, AML-CFT compliance, and
with limited awareness among resident entities about responsible sourcing, rather than stringent net worth
the benefits of hedging, has hindered the growth of criteria, the guidelines can foster greater participation
from mining entities and aggregators. This inclusive
derivatives trading. Certain AD-I banks may have approach can strengthen India’s position in the global
complicated processes in place for enabling hedging for
resident entities, as this is the first time residents have bullion ecosystem.
been allowed to hedge gold price risks through exchange
mechanisms. Additionally, informal transaction methods, Overall, the exchange ecosystem at GIFT-IFSC is on
the cusp of a significant transformation. With growing
such as hawala, remain prevalent among some resident participation from banks, enhanced awareness of hedging
entities, as they perceive them to be easier and less
scrutinized. benefits, and forward-looking regulatory measures, the
platform is poised to become a key player in the global
bullion market. These developments will not only boost
Another critical issue is the fear of scrutiny by tax authorities. India’s role in price discovery but also establish GIFT-IFSC
Many entities may be apprehensive about showing losses as a hub for responsible and sustainable bullion trading.
in their books due to hedging activities, despite the fact
that hedging itself does not incur actual losses. This
misunderstanding of hedge accounting, where losses

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