• Commodity index options, futures also under consideration
  • Biggest overhaul as commodity markets brought under SEBI

India plans to throw open its restricted commodities market to foreign funds and allow trading in commodity index futures and options to help lure institutional investors with a wider array of products for higher volume.

The Securities and Exchange Board of India, which will now oversee commodities in addition to stocks after bringing the Forward Markets Commission under its fold, will bring about these changes “gradually in a few months,” Chairman U.K. Sinha said at an event marking the merger of the two regulators in Mumbai on Monday.

“There’s no reason why options and index futures trading should not be allowed in commodity derivatives markets," he said. “There’s no reason why banks and foreign portfolio investors that are not allowed today should not be allowed."

India is seeking to boost trading in commodity futures as FMC data show total volume more than halved to 28.8 trillion rupees ($435 billion) in the five months through August from 59 trillion rupees in the same period in 2013. More products and participants will help expand the market beyond small brokers, said B.C. Khatua, a former chairman of FMC.

Futures Ban

Commodity futures in India have been a politically sensitive issue. Despite a report by a government panel that showed no link between futures trading and wider swings in spot prices of food items, policy makers briefly suspended trading in soybean oil, potato, rubber and chickpea futures in 2008 after leftist parties blamed speculation by traders for rising inflation.

"Sebi will first test the waters, feel its feet, take its time and then get into adventurous things and that’s a positive," Khatua, said. "They will first look at stability and continuity in the commodities markets."

The regulator will gradually allow commodity exchanges to trade securities and stock exchanges to trade commodities, Sinha said at the event attended by Finance Minister Arun Jaitley, who announced the formalization of the merger. Market participants will get up to three years to conform to stricter regulations mandated for securities trading, Sinha said. 

“The merger will lead to better convergence of price from the physical market into the derivatives market,” Sinha said.

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