Need for a Stronger regulator, more hedge instruments, institutional players.
Expectations of a stable government at the Centre have raised hopes of commodity market reforms being implemented faster. Much needed, these reforms have been on hold for the past two years. One single measure that could provide a big push is to amend the act governing commodity futures.
This latter market has grown multi-fold in the past five years and annual volumes have crossed $1 trillion (Rs 5 lakh crore), beside growing at over 20 per cent yearly. Such a stupendous growth without the market regulator having enough powers needs the urgent attention of policy makers.
The move to strengthen the regulator, the Forward Markets Commission (FMC), should be on the priority agenda. A bill to amend the Forward Contract Regulation Act (FCRA) was introduced in Parliament but due to political compulsions, it could not be passed.
Now there are no such compulsions and soon after this time’s voting was over, FMC allowed wheat to be made available for trading in the futures market. Joseph Massey, MD & CEO of the Multi Commodity Exchange (MCX) says “Government should amend the FCR act and strengthen the regulator, make it autonomous to guide the market to a second leap of growth.”
“The amendment bill needs to be reintroduced,” said B C Khatua, Chairman, FMC. It had provisions to provide autonomy to FMC, giving it power to take penal action on all market intermediaries and introduce more hedging instruments like options and index-based trading.
If government wants to give a rural thrust to the economy which can generate jobs, there is need for developing the warehousing industry. A warehousing development authority is in place. The growth of warehousing would be complimentary with the growth of commodity markets, whether futures or spot. To ensure this, Massey said, “Commodity futures, spot markets and the warehousing regulator should be integrated.”
Integration of these segments under one regulator would allow it to plan for the integrated market, as all are linked.
If the FCR act is amended as proposed earlier, then introduction of options trading and index trading would be possible. Exchanges and market participants are eagerly waiting for that. Says Massey, “If options are available, farmers would also hedge their crop, even without waiting for minimum support price.” The buyer of an option gets the right to exercise that option by just paying a small premium. His risk is confined to the premium paid. Thus, it is the cheapest form of hedging. Options trading is most popular in equities.
Trading in indices is another facility where speculative action can move to indices. The proposed amendment would pave the way for these instruments.
Another issue limiting growth and use of commodity futures is the absence of institutional players. Mutual funds and banks are not allowed to participate in futures.
An autonomous and powerful regulator for commodity futures will be able to coordinate with the Securities and Exchange Board of India and the Reserve Bank of India and smoothen the way for entry of institutional players in these markets. Such players help improve the liquidity and depth of the market.
The futures market indicates the price movement at a future date and is guided by the spot market. Hence, modernising and reforming the spot market (or mandis) will strengthen this integration.
