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In a major boost to the sagging commodity market, the Reserve Bank of India is considering a proposal to allow foreign institutional investors (FIIs) to trade in commodities.
The commodity market regulator, Forward Markets Commission, is expected to meet the RBI in this regard shortly, according to sources.
The proposal has surprised market participants, who were expecting the RBI to allow banks to trade first on the commodity exchanges before opening the doors to the FIIs.
As banks actively lend to traders and farmers against warehouse receipts, it would have been logical to allow banks in first, said an analyst, who did not want to be identified.
Under the Banking Regulation Act, banks are not allowed to participate in commodity trading. Though time consuming, amending the Act and letting the banks enter the commodity market would be wiser, the analyst said.
The move comes at a time when the turnover on the four national commodity exchanges has more than halved in the last one year because of a new commodity transaction tax and an unprecedented trade default of ₹5,600 crore by National Spot Exchange Ltd.
But Navin Mathur, Associate Director (Commodities & Currency), Angel Broking, said participation of foreign investors in the commodity market would improve the sentiment and build confidence among traders.
Panel reportIn April, a detailed report, ‘Steps to Fulfil the Objectives of Price Discovery and Risk Management in the Commodity Derivatives Market’, by a panel headed by DS Kolamkar, a senior economic advisor in the Ministry of Finance, was submitted to the Government.
The report dealt with the pros and cons of allowing banks, domestic institutions and foreign institutions to enter the commodity market.
“If foreign players can swing the stock market as they like, their huge fund flow into commodity markets can cause havoc with no counter balance from domestic institutions and banks,” said an analyst.
Market participants feel that the regulators should put in checks and balances to restrict foreign fund flow as the market currently lacks depth, particularly in agriculture commodities.
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