The Securities and Exchange Board of India (Sebi) plans to engage with the government to increase institutional participation in the commodity derivatives segment, chairman Tuhin Kanta Pandey said on September 17.
"Enhanced institutional participation will bring in higher liquidity, making the market more attractive for hedging," said the chairman, while speaking at an event organised by MCX. The regulator is considering allowing foreign portfolio investors (FPIs) access to more commodities, while enabling entry of banks, insurers and pension funds to trade in the segment.
"We will keep working towards a regulatory framework to enable prudent institutional access to these markets. A proposal to allow FPIs to trade in non-cash settled non-agricultural commodity derivative contracts is also currently under examination. We will also engage with the government to consider banks, insurance companies, and pension funds to trade in these markets," Tuhin Kanta said.
Allowing more categories of institutional investors to access the commodity derivatives market has been a long-standing ask by the industry. Currently, FPIs are allowed only a limited access in the commodity market, in only contracts that are cash settled, with crude and natural gas in the category.
Market participants welcomed the announcement, and said if institutional participation of banks, insurance companies and pension funds is allowed in the commodity market, the volumes, especially in precious metals, industrial metals and energy products would see a significant growth.
Sebi chairman said Sebi has taken several steps to deepen the commodity markets ever since the erstwhile Forwards Market Commission (FMC) was merged with the capital markets regulator in 2015.
"We have taken deliberate and decisive steps to deepen our markets and make them truly reflective of India's economic reality. A crucial step was delivery certain metal contracts, which tightened the link between the physical and derivatives market. It was a step towards self-reliance, allowing our market participants to reduce their reliance on international standards and adopt Indian benchmarks. Late evening trading has helped domestic participants synchronise with the active European and North American trading hours," Tuhin Kanta Pandey said.
Referring to the ongoing tariff war and concerns around the supply chain of rare earth elements, Sebi chairman said the role of commodity market becomes even more important.
"The recent doubling of tariffs on aluminium and copper imports by the US, for instance, is a development that directly affects India's export landscape. In such a volatile environment, a robust derivatives market provides a powerful shield, allowing Indian producers and consumers to hedge against global price shocks. This need for resilience is even more pronounced in the context of critical minerals. These minerals like lithium, cobalt, nickel, and rare earth elements are the building blocks of a green energy future," said the Sebi chairman.
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