It’s Reforms Time in Commodity Market


Government seems to have learnt from Rs. 5600 cr scam in NSEL ( National Spot Exchange) . After the NSEL scam the turnover in the commodity exchanges has gone down drastically . For growing economy like India , we cannot afford the same. In commodity exchange in the need of the hour is right price discovery for the commodities that are being traded , however due the reduced turnover market lacks depth and the objective is not achieved.

Control of FMC shifted to finance ministry

The important step that has been taken is the control of FMC ( Forward Market Commission ) the regulatory body of commodity exchanges has been shifted from consumer affairs ministry to finance ministry , however still lacks administrative free dom. The ultimate aim should be all the exchanges be it commodity , equity , currency should be brought under the control of SEBI with requisite authority for effective control , monitoring and prevention of scams .

Enhancing liquidity

FMC is considering to introduce market makers to increase turnover. The price is the resultant of trading which is outcome of supply and demand forces./ For this it is going to introduce liquidity enhancement mechanism ( LES ) to encourage the brokers to participate activity and this create market makers. Market maker is a broker-dealer firm that accepts the risk of holding a certain number of units ( contracts) of a particular commodity in order to facilitate trading in commodity Each market maker competes for customer order flow by displaying buy and sell quotations .

Entry of FIIS and commercial banks

The cost of transactions in commodity market is high , in order to address this problem RBI is considering to allow the FIIs ( Foreign Institutional Investors) and commercial banks to trade in commodity markets , this will serve the dual purpose of increasing the turnover in the market and bring the cost of transactions down. With increase turnover the will also serve the objective of right price discovery. At present commercial banks are not allowed to trade in commodity market under Banking Regulation Act . However government is considering amending the act so that banks can participate in this market. This will make the commodity exchange more live and active which had gone into huddle after NSEL scam broke out.

The flip side of FIIs participation

The FIIs have got massive financial power and the same has been demonstrated in the equity market Indian stock market is virtually controlled by FIIs. This may lead to volatility in commodity spot prices and can be serious cause of concern especially for agricultural commodities . Hence RBI and government should strike the balance by equal participation by commercial banks and domestic financial institutions so that volatility can be reduced to large extent and FIIs do not take the control of commodity markets .

Overall it is good that government had decided to reform the commodity markets as well , however it should be done with cautious and long term beneficial approach to benefit our economy

Koustubha M Kelkar