RBI hedging directive

SEBI is not the only regulator with a stake in commodity price risk. A bank that lends against a stock of, say, cotton or steel is also exposed — if the commodity's value falls sharply, the collateral behind the loan is worth less.

To manage this, the Reserve Bank of India has told banks to nudge their borrowers in the right direction. Where a loan is given against commodities held as collateral, the bank must advise that borrower to hedge the commodity price risk. It is a supervisory directive to banks about their lending book, not a rule that touches the exchange or the broker directly.

The workbook places this in section 8.4, "Other Regulatory Norms to Encourage Commodity Derivatives," alongside two SEBI-led steps from 2019: circulars of 21st and 22nd May 2019 letting Mutual Funds and PMS participate in commodity markets, and SEBI's LODR mandate requiring listed companies to disclose their commodity risk management policies and hedge ratios. The RBI directive sits beside these as the banking-side piece of the same push: it tells banks to advise their borrower clients to hedge commodity exposure whenever the lending is done against commodities as collateral.

The common thread across all three is encouragement rather than compulsion on the end user — SEBI opens the door for institutional players, mandates disclosure for listed companies, and RBI works through the lending relationship to reach the borrower.

A cold-storage trader takes a working-capital loan of Rs 3 crore from a bank, pledging 500 tonnes of stored potatoes as collateral, valued at roughly Rs 60,000 per tonne.

Following RBI's directive, the bank's relationship manager advises the trader to hedge this exposure by selling potato futures for a matching quantity on the commodity exchange. If potato prices later fall to Rs 50,000 per tonne, the collateral value drops by Rs 5 crore in aggregate stock terms across the market, but this trader's own 500 tonnes are worth Rs 3 crore less relative to peak, a Rs 50,000-a-tonne fall matched, if hedged, by an equivalent gain on his short futures position — protecting both the trader's equity in the stock and the bank's security cover.

Chapter 8 (Legal and Regulatory Environment), section 8.4, in the same short passage that lists SEBI's 2019 circulars on Mutual Fund and PMS participation. Expect a recall question on which regulator directs banks specifically — RBI, not SEBI — and on what triggers the advice: lending against commodities as collateral.

• This is RBI's directive to banks, not a SEBI rule and not an obligation on the exchange or the broker.
• It applies specifically where the loan is secured against commodities as collateral — not to every loan a commodity business takes.
• It is advisory to the borrower through the bank, not a hedging mandate SEBI enforces on market participants directly.