According to top RBI officials, risk management by Indian corporates for hedging their products in the international commodities exchange will be the main focus of the detailed guideline on commodities hedging by the RBI.

The central bank is likely to follow the recommendations suggested by the Gupta Committee on ``Hedging through International Commodities Exchanges''.

"Hedging will be done in phases. The first phase will be ``familarisation,'' where the main focus will be on development of core risk-management skills of corporates, hedging strategies and new products," sources said.

As per the centre's circular on hedging ofcommodities in the international exchanges, the trading will be kicked off with futures products. Options trading will be allowed only for the purchase of commodities and not their sale. "Options trading on sale of commodities by Indian corporates will create huge forex liability for them as they will have to pay fees upfront. We do not want Indian corporates to initially take huge risks without having an expertise in this field," sources said.

According to sources, access of Indian corporates will be limited to standard futures contracts issued by broker firms, which are members of the exchange.

Over The Counter (OTC) products will be introduced in the later phase. "For developing OTC market and related sophisticated products a much-needed depth in the market, along with liquidity, transparency and sophisticated products, are required," sources said.

According to sources, during the first phase, a regulatory framework should include an exercise at pre-eligibility stage to make certain that theconcerned corporate has an authentic underlying exposure, a clear risk-management policy and a proper internal control system. "The central bank should periodically scrutinise the hedging operation of corporates during the first phase," sources said.

The Gupta Committee report, which was submitted in November 1997, recommended a phased development of hedging of commodities in the international market. As per the report, hedging of commodities should be done in two phases. In the first phase, futures trading should be adopted as it will expose the Indian corporates to authentic price exposure to achieve risk reduction.

As per the report, during the first phase, corporate exposure should be limited to futures trading by brokers who are clearing members of the exchange. In the second phase, Over The Counter products should be introduced as these products are flexible and tailormade to suit buyer needs.