SEBI, RBI Explore Allowing Banks to Trade Commodity Derivatives to Boost Market Liquidity

The Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) are in discussions to allow commercial banks to trade in commodity derivatives, aiming to boost market liquidity and increase institutional participation, SEBI Chairman Tuhin Kanta Pandey announced on Thursday.

Speaking at an industry conference, Pandey said that SEBI is working closely with the RBI to develop a regulatory framework that will permit banks and other financial institutions to access the commodity derivatives market in a prudent and responsible manner. This move is part of SEBI’s broader agenda to deepen the commodity market, which has traditionally struggled with limited liquidity and occasional trading restrictions, especially for agricultural contracts.

Pandey highlighted that while many Indian companies are significant consumers of commodities, they currently operate as price takers because of the market’s shallow depth. Allowing banks to participate in commodity derivatives trading is seen as one way to enhance market depth and efficiency.

If approved, this initiative would further relax existing restrictions on banks’ usage of surplus capital. It follows the RBI’s recent announcement in October permitting domestic banks to finance mergers and acquisitions, a move intended to invigorate India’s deal-making landscape worth over $40 billion.

The expansion of commodity derivatives trading to include banks could also create favourable conditions for high-frequency trading firms, which have shown growing interest in Indian commodity markets. For example, Citadel Securities LLC has recently expressed ambitions to enter this space, citing its significant growth potential.

SEBI is also considering allowing foreign portfolio investors and insurance companies to participate in commodity derivatives. The regulator plans to address challenges related to physical delivery and tax issues to facilitate smoother market operations.

This collaborative regulation effort marks an important step towards broadening institutional access and improving price discovery in India’s commodity markets.