India moves towards modernising futures trading

The prospect of India’s commodities exchanges trading options, a move intended to boost liquidity in markets and stabilise prices, has taken a step forward after the cabinet approved proposed legislation.

The government said on Thursday it would introduce legislation in parliament that would permit the trading of options in goods and in commodity derivatives. It would also give the Forward Markets Commission, which regulates four national exchanges and 16 regional ones, greater autonomy and powers to regulate the market.

“New products like options will be allowed in the commodity market,” a statement issued by the government said after the cabinet, headed by prime minister Manmohan Singh, approved amendments to a regulatory bill. “This will benefit various stakeholders including the farmers.”

The bill still has to clear parliament, where issues relating to agricultural commodities can often face stiff debate. The amendment relating to forward contracts had first been introduced to parliament four years ago. In the past there has been widespread mistrust that futures inflate prices, a sensitive issue at a time of high food inflation and low agricultural productivity.

India first allowed futures contracts in commodities trading in 2003. While New Delhi is taking further steps to modernise its markets, restrictions remain in place banning futures in some agricultural commodities, such as rice, for fear that they might encourage speculation and higher food prices. A ban on wheat futures was lifted last year; restrictions on sugar futures are expected to be lifted next month.

Analysts tracking commodities in India said the changes, if passed by parliament, would professionalise the market, improve its regulation and reduce price speculation. The reforms also promise to unlock greater private investment in India’s commodity exchanges by paving the way for the demutualisation of existing commodities exchanges.

Last month, the FMC said the Reliance Exchange Net, owned by Anil Ambani, planned to buy a stake in the Indian Commodity Exchange, ICEX, a metals bourse launched last year, from the Indiabulls group. Jaypee Capital, a Mumbai-based financial services company, has also expressed a desire to buy 26 per cent in the National Commodity and Derivatives Exchange (NCDEX), an agri-bourse.

The FMC regulates commodity futures trading on four national and 16 regional bourses.

“The government’s move will have a significant and positive impact for the commodities trading community,” said Amar Singh, head of commodities research at Aditya Birla Money, a broking firm in Mumbai.

“By opening up the trading of commodity options, we will see more professional players, like banks and mutual funds, enter the market.”

A senior commodities analyst at Angel Broking, a Mumbai-based stockbroker, said farmers would also benefit from the new rules.

“The move by the union cabinet will be appreciated by farmers as it will make life easier for them to predict prices and manage their risk better,” he said.