RBI set to allow FIIs, banks to trade in commodity market

Move to help reduce hindrance to the commodity market due to high-cost futures transactions

 

The Reserve Bank of India (RBI) is set to give in-principle approval for foreign institutional investors (FIIs) and banks to participate in commodity markets, say sources in the know.

“The matter is in the final stage of internal review and an in-principle approval is just a matter of time,” said a source.

The development comes at a time when the country’s commodity exchanges (commexes) are suffering a heavy drop in turnover. According to a report by news agency Press Trust of India on Wednesday, the combined turnover of India’s commexes in April-November declined 48 per cent from the year-ago period to Rs 39.88 lakh crore, mainly due to poor trading volumes. According to Forward Markets Commission (FMC) data, these exchanges had generated a business of Rs 76.78 lakh crore in April-November last year.

In May, a five-member committee had said high-cost transactions in commodity futures caused a hindrance to the market. And, suggested this could be reduced if banks and FIIs were allowed to participate in the commodity market.

 

The panel, headed by senior economic advisor in the finance ministry, D S Kolamkar, had on April 28 this year given a report on ‘Steps to fulfil the objectives of price discovery and risk management of the commodity derivatives market’.

 

The committee had told the government in the report that high transaction costs in the futures market were an impediment to arbitrage. These, the panel had said, could be reduced by allowing banks and financial institutions, including FIIs, to participate in commodity futures trading.

The panel had as members Institute of Company Secretaries of India (ICSI) Secretary M S Sahoo, finance ministry advisor C K G Nair, Indira Gandhi Institute of Development Research professor Susan Thomas and Forward Markets Commission economic advisor Usha Suresh.

Policy and regulatory hurdles currently restrict banks and financial institutions from participating in the commodity market. Banks are also restricted under the Banking regulation Act. The committee suggested these needed to be removed, to widen participation.

The existing system of limits on open interest and risk management provides adequate safeguards against the risk of allowing foreign participation in Indian markets, it said.

The report also said commexes should explore the idea of extending trading hours that overlap with Asian and Australian markets, to improve their international competitiveness. At present, trading hours in India overlap with the European markets, but have little or no overlap with Australia and Asia, a large trading base that remains untapped.

The committee also advised the government exempt arbitrageurs from restrictions on holding inventory. It strongly objected to abrupt suspension of trading in commodities and recommended the commodity markets regulator voluntarily adopt regulatory governance rules from the draft Indian Financial Code, to reduce legal and regulatory risks in the eyes of financial firms.