With Prime Minister Narendra Modi exhorting everyone to work towards making India "self-reliant" by seeing the COVID-19 crisis as an opportunity, a new proposal is being mooted to lower the Indian market's reliance on global exchanges for price discovery of commodity futures contracts.
Multiple officials and capital market participants said the coronavirus pandemic has also exposed the risks associated with the huge dependence on contracts traded on international bourses, especially in segments like energy futures where 'compulsory delivery' on expiry of contracts is not mandatory and are therefore mostly used for speculative purposes.
Several brokers and their clients are said to have been hit hard recently after one particular month's contract for crude oil on one exchange plunged into negative zone due to insufficient storage facility for excess oil amid the pandemic, resulting into positions taken by traders here also facing a negative settlement price.
Several big institutions globally, including in China, have barred fresh investments in crude oil and other commodity futures linked to global contracts due to the extreme volatility in prices.
A senior official also flagged the additional volatility caused by such trades in USD-INR rates, a very crucial economic parameter, as the underlying international contract traded on a foreign exchange is typically in the US dollar and that price is converted into Indian rupee by the domestic exchange to decide the buy/sell price.
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"For example, let's assume that the crude oil or natural gas quote on a US-based exchange, to which the contract on an Indian bourse is linked, remains flat one day, but the price derived for Indian traders here can still change if there is a change in the USD-INR rate," the official said.
"Many speculators are actually doing simultaneous trades in USD-INR and energy futures contracts to make easy money and this causes unnecessary additional volatility in this very significant economic parameter of the currency exchange rate," he said explaining their typical modus operandi.
Senior executives at various exchanges and other capital market entities said they would fully support the government and regulators if they devise a mechanism to reduce the dependence on global contracts to safeguard the interest of Indian investors, which have been as such hit hard due to the extreme volatility abroad.
An eminent banker, whose organisation also had to suspend positions in energy contracts due to losses caused by volatile prices, said an India-centric price delivery mechanism would certainly help the country's commodity market. The CEO of an exchange also echoed similar views.
Officials said the regulators and the government would actively engage with market participants before taking any final decision as their aim is to safeguard the interest of all stakeholders, but investors' interest would obviously be paramount.
None of the officials or industry veterans wanted to be named till a final decision is reached in this regard.
They also referred to multiple occasions in the last few weeks when the prime minister has talked about an urgent need to make India self-reliant and turn it into an economic powerhouse by taking the coronavirus crisis as an opportunity.
During his recent interactions with various groups, including of ministers and chief ministers, Modi has said India needs to lessen its dependence on others due to the emergent challenges posed by COVID-19 and asked all departments to maintain an objective index on how their work will promote Make in India.
"To become self-reliant and self-sufficient is the biggest lesson learnt from the coronavirus pandemic," he had said.
Rashtriya Swayamsevak Sangh (RSS) chief Mohan Bhagwat also recently advocated 'Swadeshi' model of economics for the post COVID-19 period to make India self-reliant.
While a final proposal may take some time to firm up and would depend on feedback from various stakeholders, some of the ideas being mooted include 'compulsory delivery' for all types of commodity futures contracts and stopping the practice of contracts on Indian exchanges being 'mirror or shadow contracts' of those on foreign bourses.
Another proposal relates to prices being made India-centric and linked to Indian markets and the contracts having specifications relating to what are traded in India in real physical markets here.
A futures contract allows a trader to buy or sell the underlying asset at a future trade. On expiry date, as mentioned in the contract being traded, the buyer either delivers the asset physically or pays the seller cash for a settlement. The difference between the purchase and settlement prices decides profit or loss.
In India, physical delivery is mandatory for bullion and base metals, but there also prices are generally linked to international markets.
While there is an option between cash settlement and physical delivery for futures on other commodities, energy contracts are mostly settled in cash as there is no rule barring individuals and companies from speculating in price of crude oil and natural gas even if they are not in the business of these commodities.
While commodity futures contracts are supposed to be aimed at providing a hedging opportunity, many market segments seldom see any hedgers and are mostly full of speculators and this pattern delinks commodities trading from the real economy, a former exchange chief said.
Officials also pointed out that all major economies have commodity futures contracts linked to their own domestic markets, but it is not the case for several commodities in India including in some segments with 'compulsory delivery' settlement option where the underlying asset prices are determined abroad.
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