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Liquidity seen sloshing towards commodity derivatives as FPIs given greenlight to flood in

Earlier only those foreign investors which had actual exposure to Indian physical commodities were allowed to trade in commodity derivatives

June 30, 2022 / 02:06 PM IST
Gold, Gold prices, precious metals

Gold, Gold prices, precious metals

Multi Commodity Exchange (MCX) of India in particular and the market as whole will be among the biggest beneficiaries of the regulator greenlighting trade by foreign portfolio investors (FPIs) in commodity derivatives, analysts said.

Securities and Exchange Board of India (Sebi) on Wednesday gave FPIs approval to trade in all non-agricultural commodity derivatives and select non-agricultural benchmark indices. To begin with, FPIs will be allowed only in cash-settled contracts.

Earlier only those foreign investors which had actual exposure to Indian physical commodities were allowed to trade in commodity derivatives in order to hedge their price risks. The system has been done away with now.

“The Sebi announcement is a small step towards a big journey to integrate and develop the Indian commodities market on a global stage. The higher participation will boost market liquidity and volumes with better price discovery,” said Tapan Patel, senior analyst (commodities), HDFC securities.

“It will open up space for large volume arbitrage and hedging trades from global players. The move will support ailing market volumes and overall market sentiment.”


Foreign investors will now be able to freely trade in metals, energy and bullion commodities. MCX being the leader in the segment will emerge as a big winner, as higher volume means higher revenue for the firm.

“It means more business to MCX as FPIs have deep pockets and they can bring in and contribute higher volumes in selected commodities,” said Prashanth Tapse, vice president of research at Mehta Equities. “As on date we have almost 10,000 FPIs registered in India and if even 5-10 per cent of them start participating it can make a good difference in MCX business as higher the volatility - higher the business for an exchange.”

Following the announcement, shares of MCX jumped nearly 4 per cent, before profit booking brought them down. The stock still traded up 1 per cent. Analysts remain bullish on the stock.

They said the greater impact of Sebi’s decision, which comes after similar approval to mutual funds and portfolio management services funds, would be seen in the long run, but in the short term the impact would unfurl gradually considering the high volatility in global commodities.

However, this will deepen the market, they said, adding that some of the lesser traded contracts may become more liquid now.

“It will help less liquid contracts and foreign players will enjoy the new tools of Indian commodity exchanges, namely, options in many commodities and indices trading along with futures,” said Vandana Bharti, assistant vice president of commodity research at SMC Global.

Though she said investors should tamp down expectations a bit as Sebi said that position limits for FPIs (other than individuals, family offices and corporate bodies) will be on par with those for mutual fund schemes as a client. “Hence, don’t expect a flood of liquidity,” she added.

Nonetheless, it will increase the depth of the commodity market which is facing a liquidity crunch in many commodities, Bharti said.
Shubham Raj
first published: Jun 30, 2022 01:45 pm
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