Mumbai: Indian commodity market players are seeking entry of banks, funds and foreign brokers in the futures market in the forthcoming federal budget, but analysts fear spiralling food prices may hinder policy moves.
“Banks and fund’s entry will push volumes up exponentially giving them increased opportunity as an asset class,” said Gnanasekar Thiagarajan, director, Commtendz Research.
India which opened commodity futures trade seven years ago has not allowed foreigners, banks and funds to trade. It also doesn’t allow options and indices trading which are volume generators across the world’s bourses.
Finance minister Pranab Mukherjee will unveil the federal budget in parliament on 26 February.
Turnover at 23 commodity bourses in India has grown to Rs52.5 trillion in 2008-09 from Rs1.29 trillion in 2003-04. Turnover is up about 50% so far in the current fiscal.
The growth is attracting investment from overseas, with Goldmans Sachs, IntercontinentalExchange owning stakes in National Commodity and Derivatives Exchange, while Fid Fund (Mauritius) Ltd., an affiliate of Fidelity International, and NYSE Euronext are investors in Multi Commodity Exchange (MCX). Analysts, however, believe this blistering growth may not sustain for long if further reforms are not put in place and one of the expectations is that the Forward Markets Commission, the market regulator, may be given more powers.
“Before the market widens to a larger scale what we need a strong autonomous regulator ... strengthening the regulator is the key to next level of reforms,” said PK Singhal, deputy managing director of MCX, the biggest bourse.
The Forward Contracts (Regulation) Amendment Bill 2006, which is pending approval in the lower house of Parliament, gives more teeth to the regulator and allows trade in options and non-deliverable commodities like weather derivatives and indices.
Now the FMC is governed by the ministry of consumer affairs unlike its autonomous counterpart the Securities Exchange Board of India and the budget is expected to contain hints on the issue of autonomy, although concrete steps may be come later.
Bourses and the regulator are also expecting FMC being made the regulator for warehouses across the country.
“We think FMC stands a good chance of becoming a common regulator for both exchanges and warehouses,” the official said. FMC already regulates warehousing operations of all commodity bourses in India, he said.
Spot and futures commodity bourses also seek infrastructure status to avail prevalent tax concessions, which they hope will trigger growth in the industry.
“The government is looking at this sector in a positive way. Last year the transaction tax was removed which brought a lot of confidence,” said Ajit Mittal, managing director of Indian Commodity Exchange, the youngest and third biggest commodity bourse. India also relisted wheat futures in 2009.
“In the immediate future, we expect entry of foreign brokers in the Indian commodity futures market..there has been a proposal by the regulator,” said an official of another commodity bourse.
Bourses and domestic brokers also demand exemption of the current tax deduction on brokerage in commodity futures trade provisioned under section 194 (H) of Income Tax Act.
But, the sharp rise in food prices continue to worry some analysts who fell it may restrict some decisions.
“Government will act cautiously ...food prices are higher..they may wait till the monsoon before taking major decisions in this sector,” said Commtrendz’ Gnanasekar.