Major Indian Jeweller Shifts Gold Hedges to MCX as Rupee-Denominated Contracts Take Center Stage

Major Indian Jeweller Shifts Gold Hedges to MCX as Rupee-Denominated Contracts Take Center Stage​

A prominent Indian jewellery heavyweight is pivoting its gold hedging strategy by migrating positions from GIFT City back to the Multi Commodity Exchange (MCX).

Sources indicate the primary catalyst for this strategic shift is the transition from dollar-based contracts to rupee-denominated contracts. This move allows the entity to align its hedging more closely with local market dynamics.

The impact of this migration is already visible on the MCX exchange. Open interest (OI) for both October and December-based gold contracts has witnessed a dramatic surge as the jeweller establishes fresh positions.

Surge in Open Interest Signals Strategic Pivot​

Data reveals a sharp spike in activity for the October contract, where open interest jumped from 869 on July 1 to 6367 by July 17. The December contract saw an even more pronounced move, rising from an OI of 40 on July 7 to 4916 by July 17.

Market observers have noted that spreads for both the October and December gold contracts have thinned significantly. Typically, there is minimal trading interest in contracts that are situated so far out, making this recent activity particularly noteworthy.

One lot on the MCX Gold contracts is equivalent to one kilogram of gold. The influx of volume reflects a significant commitment from large-scale domestic players seeking liquidity and price certainty.

Navigating Basis Risk and Currency Dynamics​

The shift comes after a period where certain large jewellers and refiners migrated to GIFT City for international dollar-denominated gold contracts. These international contracts are directly linked to the global price of gold denominated in dollars.

Previously, when refiners hedged on MCX, they faced challenges where fluctuations in premiums and discounts created basis risk. This exposure led to potential losses, prompting some large participants to explore GIFT City as an alternative for hedging large positions.

In GIFT City, these large players also utilized over-the-counter (OTC) transactions. These trades were conducted with International Banking Units (IBUs), involving major Indian and foreign banks to manage gold positions outside of standard exchange listings.

Domestic Market Alignment and Price Matching​

While MCX Gold typically trades at a discount to global prices, some analysts attribute this to the 15% customs duty. However, for a jeweller operating at this scale, the focus remains on the quality of the hedge rather than just the nominal price spread.

Experts suggest that for massive domestic players, hedging on MCX is more logical because it reflects the local rupee-denominated price. This ensures that the hedge accurately mirrors the actual purchase prices faced in the domestic market.

Industry insiders pointed out that while overseas hedging is appropriate for gold imported directly, the MCX provides a superior price match and hedge for purchases sourced from the domestic market. This alignment reduces complexity for firms dealing primarily with local supply chains.