RBI May allow banks, FII’s to Commodity Markets

In a significant move, Reserve Bank of India (RBI) might give its in-principle approval to allow foreign institutional investors (FIIs) and banks to participate in commodity markets.

In May, a five-member committee had said high-cost transactions in commodity futures caused a hindrance to the market, and suggested this could be reduced if banks and FIIs were allowed to participate in the commodity market.

The panel, headed by senior economic advisor in the finance ministry, D S Kolamkar, had on April 28 this year given a report on ‘Steps to fulfil the objectives of price discovery and risk management of the commodity derivatives market’.

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