Credit flow to traders may tighten

RBI move aimed at curbing inflation, FMC too joins fight against price rise.

In line with a slew of fiscal measures taken by the government to check inflation, both the Reserve Bank of India (RBI) and the Forward Markets Commission (FMC) have got into action.

In an attempt to curb hoarding of essential commodities, RBI may reduce the period of cash credit facility given by banks to companies and commodity traders. Usually such credit in foreign or domestic currency is given to companies for a maximum period of 180 days to manage their working capital.

Under the proposed changes, the cash credit facility period may be cut to 15-30 days for essential and sensitive commodities. A term loan is a long-term credit spanning across 3 to 5 years' maturity, while the working capital credit is for a very short period.

Sources said since working capital loans were usually rolled over, banks would get an opportunity to evaluate the end use before sanctioning the rollover of the working capital limit.

Meanwhile, FMC, the regulator for the commodities market, has already alerted commodity exchanges to report quotes and trading patterns of illiquid contracts on the futures market.

FMC Chairman B C Khatua said market players should know the time and date of price quotes for trading of an illiquid contract and therefore exchanges should mention them, especially in the case of illiquid contracts. This could prevent confusion among market players.

As a long-term measure, FMC has suggested to the RBI that commodity exchanges are the ideal platform for trading in currency futures. RBI is in the process of introducing trading in currency futures in India.

Khatua clarified that internationally there was a lot of correlation between price movements in currencies and commodities and thus it made sense for currency futures to be traded on commodity exchanges with required checks and balances prescribed by RBI.

FMC has already approached the Securities and Exchange Board of India (Sebi) to allow mutual funds to trade in commodities, a move that could deepen the commodities market.

Sebi, in turn, has assured FMC that the matter could be looked into once the Forward Contracts (Regulation) Amendment Bill, 2008, is passed.