RBI set to allow FIIs, banks to trade in commodity market

The Reserve Bank of India (RBI) is set to give in-principle approval for foreign institutional investors (FIIs) and banks to participate in commodity markets, say sources in the know.

In May, a five-member committee had said high-cost transactions in commodity futurescaused 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 told the government in the report that high transaction costs in the futures market were an impediment to arbitrage. These, the panel had said, could be reduced by allowing banks and financial institutions, including FIIs, to participate in commodity futures trading.

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 needed to be removed, to widen participation.

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

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

ALL THE EQUITY TRADERS AND INVESTORS SHOULD NOW THINK TO DIVERSIFY INTO COMMODITY MARKETS BY THIS CLEARANCE FROM RBI. 

ONE CAN DIVIDE THE CAPITAL IN THE RATIO OF 30:70 IN COMMODITIES AND EQUITIES RESPECTIVELY, TO TRADE ON BOTH SIDES AND MAXIMISE RETURNS IN TIMES TO COME