Wider FPI participation poised to boost India’s commodity derivatives markets: FOW India 2026

Speaking at the FOW India conference held at Mumbai on Thursday, Nitesh Jaiswal, chief executive, Jaypee Capital IFSC, observed that the Securities Exchange Board of India (SEBI) initially prioritised building domestic player participation, before opening up markets to foreign players.

“Expanding participant base, not just from the domestic investors but also from the international players, adds value,” said Jaiswal.

“If we want to attract more, what we need are stable policies, stable platforms, clarity of mind in terms of what can work and what cannot work. If the implementation is made with the right approach, I think it's just a matter of time that we see the success flowing through thereafter,” he added.

SEBI in August issued a consultation paper proposing to widen the participation of foreign portfolio investors (FPIs) in exchange-traded commodity derivatives. This includes permitting them to trade physically settled non-agricultural commodity contracts, subject to a mandatory exit mechanism before the delivery period begins.

Rajesh M. Sharma, senior executive vice president and head of custody, HDFC Bank, cautioned that widening participation must be accompanied by improvements in settlement mechanisms and the broader market infrastructure, particularly where commodity contracts involve physical delivery.

While encouraging FPI participation, Sharma also emphasised widening the domestic participant base.

“I think it's very important to bring in more mutual funds, alternative investment funds, they're running large sizes now,” said Sharma.

“I think the second thing which I personally believe is more in terms of the whole eco space which is around the settlement part.”

Drawing a comparison with equity derivatives, Sharma said commodity markets presented additional operational challenges because of warehouse operations, delivery obligations and the need to coordinate across multiple market participants.

Leelavathi Naidu, senior partner, IC RegFin Legal, who moderated the panel, noted that there has been a growth in commodity contracts.

Of the more than 104 commodities eligible for trading under the applicable government framework, around 34 were listed on exchanges, with only about 14 witnessing relatively active participation, she noted. Liquidity remains concentrated in a limited number of contracts despite the breadth of products available, she added.

Jaiswal said that product innovation must be driven by genuine hedging needs, supported by adequate research and a clear understanding of the underlying market.

“You never know which product succeeds, but one important thing is that a product should be launched where there is a real need for hedging,” he said.

Jaiswal noted that exchanges need to identify natural hedgers, establish appropriate contract specifications and build a sustainable participant base before introducing new products.

The panel identified the evolution of India's commodity market regulatory framework as a significant factor behind the segment's growth over the past decade.

Jaiswal traced a major turning point to September 2015, when the Forward Markets Commission (FMC) was merged with the Securities and Exchange Board of India (SEBI), bringing commodity derivatives under the securities market regulator.

He also pointed to increased price volatility as a factor that has attracted participants to commodity markets. Sharp movements in crude oil, gold and silver prices have created greater demand for instruments that allow businesses and investors to manage exposure to changing prices, he added.

Jaiswal highlighted the London Metal Exchange's (LME) network of delivery locations, which connects financial trading with the physical movement of metals. Such infrastructure gives market participants a recognised mechanism for fulfilling delivery obligations and supports the relationship between derivatives prices and the underlying physical market.

He also referred to CME Group's clearing and collateral arrangements as examples of how exchanges can support liquidity while managing risk.

The future of tokenisation was another key topic, particularly in the context of younger investors' preference for digital financial products.

Sujit Kadakia, chief business officer, Emkay Global, highlighted the potential of digital assets to extend beyond trading into collateral management and settlement. He said the benefits could be more significant if digital infrastructure enabled faster settlement and more efficient use of assets across the financial system.

The discussion comes at a time when SEBI has been taking several measures to boost liquidity in India’s commodities market.

SEBI issued a consultation paper earlier in May proposing extending early pay-in benefits to commodity options contracts, a framework currently applicable only to futures contracts.

SEBI in March revised the norms related to the settlement guarantee fund in the commodity derivatives segment for clearing corporations.

However, the regulator in March extended its ongoing suspension on certain agricultural commodity derivatives contracts to seven more commodities until March 2027.