By Abhirup Roy and Rajendra Jadhav
MUMBAI - India could start allowing institutional investors to trade in its annual $1 trillion commodity futures market as soon as in a month, the head of the country's capital markets regulator said on Friday, as the government targets deepening of the market.
Asia's third biggest economy has allowed futures trading in commodities since 2003 but has so far kept out foreign investors, banks, mutual funds and other institutions. The move to open up to institutional investors will give large companies hedging opportunities and help in integrating the spot and futures markets.
"Without the active participation of institutional investors this market cannot grow," U. K. Sinha, chairman of the Securities and Exchange Board of India (SEBI), told reporters on the sidelines of a conference.
Mutual funds are likely to be the first to get access to the commodity futures market, may be in a month, Sinha said.
Banks have huge exposure to commodities through their lending programmes and they need to hedge the risk, he said.
SEBI is in early discussions with the Reserve Bank of India (RBI) to allow banks to participate in the commodity futures market, he added.
While SEBI has been pushing to allow institutional investors into commodity futures, it needs to consult with the central bank to allow entry for banks and foreign investors.
Market participants welcomed SEBI's plan as in the last few years commodity futures markets have stopped growing.
Indian commodity futures volumes have fallen to 67 trillion rupees ($998.96 billion) in 2015/16 from 170 trillion rupees in 2012/13.
Institutional players' participation will boost commodities trade and restore confidence of retail investors, said Harish Galipelli, head of commodities and currencies at Inditrade Derivatives & Commodities.
Confidence in India's commodity markets suffered a blow in July 2013 when National Spot Exchange Ltd (NSEL) abruptly suspended trading in most of its contracts. Investigations by the Forward Markets Commission (FMC) subsequently showed a fraud of 55 billion rupees.
"For better price realization you have to have a mix of all the participators in the market apart from speculators," Galipelli said.
Goldman Sachs Investments (Mauritius), Blackstone GPV Capital, Matthews Asia Growth Fund and InterContinental Exchange (ICE) are among foreign investors that hold stakes in Indian commodity exchanges.
"Thin liquidity forces many large companies to hedge on overseas exchanges. With the entry of institutional investors liquidity will rise and we may see them hedging on local platforms," said a Mumbai-based broker with a global trading firm.
SEBI is also planning to allow options trading in commodities. A decision on amending the existing Securities Contract Regulation Act is to be taken very soon, paving the way for the launch of commodities options, Sinha said.
($1 = 67.0700 Indian rupees)
(Reporting by Abhirup Roy and Rajendra Jadhav; Editing by Muralikumar Anantharaman)