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After years of regulatory dithering, foreign and domestic institutions might look forward to entry into the commodity derivatives market.
The Reserve Bank of India (RBI) and the Forward Markets Commission (FMC) are meeting next week to consider the proposal, suggested by a sub-committee of the Financial Stability and Development Council.
Allowing domestic financial institutions such as banks and mutual funds was made by the commodities markets regulator many years earlier. The FSDC sub-committee has gone a step forward by suggesting even foreign companies and foreign institutional investors (FIIs) be allowed in commodities derivatives.
The suggestion was made at a meeting in August, the abridged details of which were released by RBI on Monday.
FIIs, banks and other financial institutions are presently allowed in all financial derivatives such as currencies and equities but not in commodities.
Samir Shah, managing director of the National Commodities and Derivatives Exchange said it had been asking for allowing foreign traders active in India’s physical commodities market to hedge their risk on commodity exchanges. “If allowed, the price discovery in commodities where India is a significant producer or consumer could shift to India,” he added.
Sources familiar with the developments said FMC Chairman Ramesh Abhishek had raised the issue of allowing players from financial institutions to hedge their risk in commodities derivatives. He is understood to have said in the meeting that banks should ask their borrowers who deal in commodities as producers or users to hedge their commodity price risk on the futures platform.
Another proposal was to allow foreign trading companies importing or exporting commodities while based in India to also hedge their price risk. There are some big multinationals like Cargill and Glencore, among others, which have huge trading interests in Indian commodities; they also export wheat, sugar, guar gum and maize, while importing edible oils and others. They are not able to fully hedge their risk.
The commodities derivatives or futures market is at a crucial juncture because volumes have fallen to their lowest level since 2009-10. The entry of new entities such as financial institutions are expected to provide depth, if banks’ borrowers dealing with commodities and foreign traders in the physical market and active in import or export, are allowed to hedge their risk on comexes.
