October 26, 2002

DBOD.No.IBS. 817 /23.67.001/ 2002–03

All scheduled commercial banks
authorized to deal in gold

Dear Sir,

Sale of Gold / Silver / Platinum - Forward contract

As you are aware, forward trading in gold was prohibited under the Forward Contracts (Regulation) Act, 1952. Government of India, Ministry of Food and Consumer Affairs, in terms of their notification dated the 19^th August 1999 exempted all forward contracts for sale and purchase of gold within the country from the provisions of the above Act if one of the parties to the contract is :

1. The Reserve Bank of India or
2. a scheduled bank as defined in section 2(e) of the Reserve Bank of India Act, 1934 and which is authorized by Reserve Bank of India to deal with or to transact in gold.

2. Following the relaxation as above, RBI vide circular DBOD.No.IBS.BC.912/23.67.001/99-2000 dated October 5, 1999 on Gold Deposit Scheme, permitted banks authorized to deal in gold to enter into forward contracts in India for buying and selling of gold with only those banks which are authorized by Reserve Bank to import gold. These banks were, however, not permitted to enter into forward contract in gold with other counterparties.

3. We have been receiving representations from jeweller exporters and other domestic jewellers for the facility of forward cover in respect of gold deals entered into by them with authorized banks. The matter has been reviewed and it has been decided to permit authorized banks to enter into forward contracts with their constituents (exporters of gold products, jewellery manufactures, trading houses etc.) in respect of the underlying sale/ purchase and loan transactions in gold with them. The tenor of such contracts should not exceed six months. Banks should put in place appropriate risk management mechanism for the purpose, like hedging their position either with other authorized banks or through exchange-traded and over-the-counter hedging products available overseas, etc. as already permitted vide our Exchange Control Department circular A.P. (DIR Series) Circular No. 19 dated January 24, 2002.

4. Please acknowledge receipt.

Yours faithfully,

(B. Mahapatra)
General Manager