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

Reserve Bank of India (RBI), the banking regulator, is set to given in-principle approval to Foreign Institutional Investors (FII) and banks to participate in the commodities markets, according to sources in the know of the development.

“The matter is in the final stages of internal review and an in=principle approval to allow FII and banks to participate in the Indian commodities market is just a matter of time,” said a source close to the matter.

In May, a five member committee said that the high cost transactions on the commodity futures market caused a hindrance to the market and suggested that it can be reduced if banks and FIIs were allowed to participate in the commodity market.

The panel had given a report on ‘Steps to fulfil the objectives of price discovery and risk management of the commodity derivatives market’ on April 28 this year.

The panel was headed by D S Kolamkar, senior economic adviser to Finance Ministry.

The committee had M S Sahoo, secretary, Institute of Company Secretaries of India; C K G Nair, advisor in the finance ministry; Susan Thomas, professor, Indira Gandhi Institute of Development Research; and Usha Suresh, economic advisor, FMC.

Policy and regulatory hurdles currently restrict banks and financial institutions from participating on the commodity market. Banks are also restricted under the Banking Regulation Act. The committee suggested that restrictions needed to be removed to widen participation on the commodity market.

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

The report also said that commodity exchanges should explore the idea of extending trading hours that overlap with Asian and Australian markets to improve their international competitiveness. Currently, trading hours in India overlap with the European markets, but has little or no overlap with Australia and Asia, which is a large trading base that has been hitherto untapped.

It committee also advised that the government should exempt arbitrageurs from restrictions on holding inventory. It strongly objected to abrupt suspensions of trading in commodities and recommended that the Forward Markets Commission, the commodity markets regulator, voluntarily adopt the regulatory governance of the draft Indian Financial Code to reduce legal and regulatory risks in the eyes of financial firms.

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