In a decision that can have far-reaching market repercussions, the government is contemplating allowing Foreign Institutional Investors to invest in the Commodity Futures markets. The annual trade value of the Indian Commodity Futures Market is worth $1 trillion.
While the country has allowed trading in Commodity Futures markets since 2003, FIIs have been kept out of the purview. Other institutions that have been prevented from trading in the futures market include banks and mutual fund houses.
The Security and Exchange Board of India, the country’s nodal agency that regulates stock market and commodity trading, admitted that market growth would stagnate without participation from FIIs. Moreover, increased participation, that will also include mutual fund houses and banks, will provide companies with ample hedging options and also work well to increase the trading frequency and volume in the futures and spot markets.
Mr. UK Sinha, Chairman of the Securities and Exchange Board of India, also said that the move is particularly expected to benefit banks, as banks often find themselves in a position that requires hedging risks emanating from their lending patterns.
Among the institutions expected to get clearance from SEBI to trade in the commodities futures market, mutual fund houses are most likely to get the nod first and will take effect in about a month’s time. As for banks and FIIs, SEBI needs to hold talks with the Reserve Bank of India to enable their entry into the market.
Market experts have embraced the move, stating that these developments are certainly promising, especially at a time when Commodities Futures markets have posted sluggish growth figures.
Investor confidence has been riding on a low tide since July 2013 in the aftermath of the arbitrary suspension in trading contracts of the National Spot Exchange Limited (NSEL). Investigations unearthed a massive fraud to the tune of over USD 800 million, according to estimates by the Forward Markets Commission.
SEBI is also considering commodity option trading, a move that would require the existing Securities Contract Regulation Act to be amended.
The crucial move to allow FIIs entry into the Indian commodity futures market will see a steep rise in liquidity as FIIs will choose domestic platforms to hedge their risk, presenting a huge growth opportunity for the Indian markets, especially the Commodity Futures markets.