Autonomy with more powers for the commodity futures market regulator, Forward Markets Commission (FMC), now seems certain with the Reserve Bank of India saying that futures trading cannot be held responsible for the recent spurt in essential commodity prices. This clearly means that futures trading is getting support from policy-makers — a fact that is likely to prompt the government to introduce the Bill granting more powers to FMC in the next Parliament session.
In its annual report released last week, the central bank corroborated the Abhijit Sen Committee recommendation that there was no clear evidence of futures trading having either reduced or increased volatility in spot prices. RBI also noted that “the prices of agricultural commodities in India after the introduction of futures need to be seen in relation to a range of factors that affect such prices, such as domestic production, buffer stock levels, government intervention in food markets through procurement policies and minimum support prices, exports of agricultural commodities, international food prices scenario and domestic supply and demand dynamics.”
The RBI observation on futures trading in commodities may prove to be a shot in the arm for the government to introduce the Bill in the next Parliament session. The Bill seeks to amend the Forward Contract Regulation Act, providing more powers to FMC, and allow instruments like option trading in commodities.
The amendments were notified in January 2008 by issuing an ordinance, but that was allowed to lapse in the wake of a sharp rise in inflation. Now the same Bill, except for some changes in the definition of commodities that can be traded in the futures market under FMC, is expected to be introduced.
In fact, the finance ministry had changed the definition to exclude currency futures from the list of commodities traded under FMC. And, the commodity futures regulator had agreed to the change.
This change was required to allow currency futures to continue to be regulated jointly by the Securities and Exchange Board of India (Sebi) and RBI. The Bill will, however, pave the way for options trading and index-based futures, besides giving autonomous status to FMC.
As a pat on the back of FMC, the central bank has also noted in its annual report that the former “has been monitoring the future prices of sensitive commodities”. In the report, RBI has remained silent on the regulatory restructuring favoured in the Economic Survey. The Survey has sought regulation of all financial markets (commodity futures has also been defined as part of it) by Sebi.
Asked for his comment, FMC Chairman BC Khatua said: “I hope now there would be no hurdles for the introduction of the Bill as early as possible.”
Khatua, however, said that there was no case for merging FMC with Sebi, irrespective of what happened with other financial regulators. The philosophy of commodity futures market was different from the capital market as in the former, sharp movements on either side were not acceptable, while in the latter, rising prices were always welcomed, he said. Even, underlyings in both the markets were different as commodities were perishable or changed form eventually, while securities remained securities all the time, Khatua added.
Earlier, a proposal was mooted to include the Chairman of FMC and a representative of the food ministry in a high-level coordination committee comprising representatives of RBI, Sebi and the finance ministry. All inter-regulator issues are discussed and sorted out by this high-level panel. However, the proposal to include the FMC Chairman in the panel has not yet been implemented, thereby giving rise to doubts on who should regulate commodity futures.
