RBI - Approval to FIIS, banks in commodity market

The Reserve Bank of India (RBI) is set to give its in-principle approval to allow foreign institutional investors(FIIs) and banks to participate in commodity markets as a move to help reduce hindrance to the commodity market due to high-cost futures transactions

The matter is in the final stage of internal review and an in-principle approval to allow FII's and banks to participate in the Indian commodity market is just a matter of time.

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 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 restrictions needed to be removed, to widen participation in the commodity market.

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

The report also said commodity exchanges 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 commodity markets regulator Forward Markets Commission voluntarily adopt regulatory governance of the draft Indian Financial Code, to reduce legal and regulatory risks in the eyes of financial firms.