The Indian government has permitted derivatives trading in 11 more commodities including skimmed milk powder, cement, apple, bamboo and timber based on a recommendation from the Securities and Exchange Board of India (SEBI), which supervises the trading, to the Finance Ministry.

In a notification issued on March 1, 2024, the Finance Ministry added these commodities under the Securities Contracts (Regulation) Act, 1956, taking the total number of commodities in which derivatives trading can be done to 104.

Other commodities in which derivatives trading has been allowed are weather, freight, white butter, cashew, metal alloys and manganese. All these changes are implemented with immediate effect.

“We at the Commodity and Derivatives Advisory Committee (CDAC) of the Securities and Exchange Board of India (SEBI) recommended trading in these 11 commodities as they are widely traded and no problem will be encounted by permitting derivatives in these,” said Narinder Wadhwa, National President, Commodity Participants Association of India (CPAI). Wadhwa is one of the members of CDAC. 

“Every year SEBI seeks derivatives trading in new commodities and the Finance Ministry has amended its notification by adding these,” said an expert in derivatives trading.

The Centre’s new circular is only an enabling provision, some commodities industry experts point out. “Now 104 commodities are eligible for derivatives trading against 91 earlier. However, the addition of a commodity in this list does not necessarily mean trading will start happening immediately. An exchange will have to study the potential of the market and submit an application to the market regulator. SEBI will then study the prospects of the commodity and allow it only if there is sufficient demand,” explained an industry executive.

On the updation of the list of commodities, another source said market participants associations will also have to be on board before a commodity can be allowed for trading.  “Most of the physical market participants are uncomfortable with online derivatives trading as they believe few players on the platform are ramping up the prices. For example, the recent launch of derivatives trading on coffee and isabgol seed by NCDEX has not seen big success,” the source said, adding that the current ban on derivatives trading in seven key agriculture commodities to check inflation continues till December-end. 

“On the one hand the government feels that derivatives trading in some commodities is stoking inflation and on the other it has added about 13 new commodities to the approved list for trading. Hedgers and investors are looking for policy certainty in derivatives trading in agriculture commodities,” the expert said.

Wadhwa said allowing derivatives in these commodities will not result in inflation. “They will help in price discovery of these widely traded commodities,” he said.

A tax solution portal, TaxGuru highlighted that these notifications are a part of the government’s ongoing efforts to reform and strengthen the financial and commodity markets in India. By updating and expanding the legal framework, the Ministry of Finance aims to ensure that India’s financial markets remain competitive, resilient, and capable of supporting the country’s economic growth and stability.