SEBI is reviewing a proposal to permit Foreign Portfolio Investors (FPIs) to trade in non-cash-settled, non-agricultural commodity derivatives, potentially opening contracts in gold, silver and other base metals to foreign institutional participation.
What the Change Would Look Like
- FPIs would be allowed to trade physically settled or non-cash metal contracts that were previously off-limits, expanding beyond the current cash-settled set (like crude and natural gas).
- The regulator plans committees and working groups to design rules, and is engaging with the government on operational issues such as GST treatment and settlement mechanics.
Why SEBI Is Considering This
- The aim is to deepen India’s commodity derivatives market by bringing institutional liquidity, improved price discovery and hedging options for producers and users of metals.
- SEBI sees wider participation (banks, insurers, pension funds, FPIs) as a way to make domestic markets more resilient to global supply shocks and trade volatility.
Potential Market Impact
- Liquidity and turnover in metal contracts (gold, silver, base metals) are likely to rise, reducing bid-ask spreads and enabling longer-dated contracts beyond current narrow horizons.
- Exchanges and intermediaries could see higher volumes and product innovation (cash-settled launches, ETFs tied to on-exchange contracts), benefiting price discovery and hedging for industry players.
- Spot and futures volatility may initially increase as global flows enter; market participants will need larger open-position limits and robust margining to manage systemic risk.
Implementation Hurdles and Risks
- Operational issues: physical delivery logistics, warehousing, GST treatment and settlement windows must be resolved before full FPI participation can be enabled.
- Regulatory safeguards: SEBI will need tightened margining, position limits and monitoring to prevent excessive speculation while allowing institutional liquidity.
- Phased approach likely: industry experts favour starting with cash-settled contracts or higher minimum contract sizes, then moving to compulsory delivery once liquidity matures.