More liquidity in commodity derivatives likely as FPIs are permitted to enter non-agricultural commodity derivatives

The market as a whole, as well as the Multi Commodity Exchange (MCX) of India specifically, will benefit greatly from the regulator’s approval of foreign portfolio investor (FPI) trading in commodity derivatives, according to analysts.

The Securities and Exchange Board of India (Sebi) approved trading in all non-agricultural commodity futures as well as a few non-agricultural benchmark indices by FPIs on Wednesday. FPIs will initially only be accepted in contracts with a cash settlement.

Previously, trading in commodity futures was only permitted by foreign investors who had direct exposure to Indian physical commodities and wanted to protect themselves against price risk. The system is no longer in place.

Foreign investors will now be able to trade freely in commodities including metals, oil, and gold. Being the segment leader, MCX will come out on top because increased volume translates into increased revenue for the company.

Shares of MCX increased about 4% after the announcement until profit taking caused them to decline. The stock was still trading higher by 1%. Analysts are still optimistic about the stock.

They claimed that the longer-term effects of Sebi’s decision, which follows similar clearance for mutual funds and portfolio management services funds, would be felt more so than in the near term due to the high volatility of world commodities.

They added that some of the less liquid contracts may suddenly become more liquid, but this will deepen the market.