Five years after the start of commodities futures trading in India, the markets have become vibrant, with exponential growth in volumes, Forward Markets Commission member Rajeev Agarwal said.
The trade volumes in commodity futures have increased to Rs 40 lakh crore 2007-08 (April-Mar) from Rs 6,60,000 crore five years earlier.
The quality of markets has also improved, with three national-level commodity exchanges trading in over 100 commodities, spread acr-oss farm goods, bullion, base metals, and energy products, he said.
However, in recent periods, trading volumes have become skewed, because values of farm products have declined and also because futures trading in a few commodities have been banned, he said.
Amendment to the Forward Contracts (Regulation) Act (FC(R)A, that is pending before the Parliament, needs to be passed so that the appropriate regulatory mechanism can be put in place for commodity futures, Agarwal said.
“The passage of the amendment will make it possible for the regulator to handle participation of institutional players like mutual funds and banks in commodity futures,” Agarwal told NewsWire18.
The FC(R)A amendment will make FMC an autonomous regulator. Unlike equity market regulator Securities and Exchange Board of India, an autonomous body, FMC comes under the consumer affairs ministry.
Agarwal said the amendment will also make it possible to introduce new products like options which will provide “traders variety in products”.
But he added that despite the existing constraints on the regulator, FMC had done a good job in limiting speculation and curbing any attempt at manipulation of prices.
He cited the example of a stringent three-year trading ban imposed on Altos Advisory Services, for illegal trading outside the exchanges, as an example of the regulator’s ability to impose strict penalties in spite of lack of autonomy.
“Harmonisation of the state laws must be done keeping in mind futures trading to facilitate physical delivery,” Agarwal said.
He said that FMC promotes delivery in farm commodities to lend more credibility to the price discovery process. Agarwal pointed out that most agricultural commodity futures now have the compulsory delivery provision.
“The threat of delivery should always remain present in the market so that nobody is able to manipulate the market on the strength of money. Provision of delivery keeps spot and futures traders alert,” the FMC member said.
Agarwal conceded that delivering commodities in futures market remains slightly more expensive than in spot markets.
“Yes, futures delivery is more expensive and it needs to become more competitive with physical markets. The exchanges are working on making it happen,” he said.
He said reforms in the fragmented spot market and warehousing network are necessary to help the development of farm futures.
