India, a major importer of crude oil, gold and industrial metals, deserves a meaningful place in the global commodities market. To happen, it has to be a price setter rather than a price taker, for which its domestic commodity market needs integration with the global financial architecture.

In an attempt to address this, the market regulator, the Securities and Exchange Board of India (SEBI), is proposing to allow access for foreign portfolio investors or FPIs (Foreign Portfolio Investments) into non-agricultural derivatives.

The objective is to bring global commodity risk management into India, the byproduct of which is increased depth and liquidity in commodity derivative markets, thus enabling the country to serve as a global benchmark.

SEBI is now soliciting views from the public to allow FPIs to participate in physically settled contracts as bullion (gold, silver and their derivatives), energy (crude oil and natural gas) and base metals (aluminium, copper, lead, nickel and zinc), even as the challenge is to ensure greater liquidity does not become greater volatility.

Overseas investors are at present not allowed to participate in contracts linked to crude, natural gas, gold or silver that are settled by actual delivery of the underlying goods.

Multi Commodity Exchange (MCX) — with combined futures and options (F&O) Average Daily Turnover (ADT) of ₹10.5 lakh crore as of Q1FY27 — has strong retail and domestic participation but relatively limited institutional depth compared with global exchanges.

FPIs could help in price discovery, and a deeper MCX could allow hedging domestically, which is currently done mainly through London, New York, Chicago and Singapore, implying a reduction in the volatility of India’s forex requirement, not a large reduction in total forex outflow.

Multiplier effect

FPIs can create a multiplier effect by providing the liquidity needed for airlines, oil marketing companies (OMCs) and industrial users to hedge efficiently on Indian exchanges.

More than 11,000 FPIs are at present registered in India; even if a tenth (conservative estimate) of them participate in the Indian commodity derivatives market, it can ingress considerable liquidity.

Margin stays within the country, brokerage paid remains domestic, and banks would need less foreign currency for collateral purposes.

Although New Delhi cannot avoid paying dollars for the demand-inelastic imported commodities, it can nevertheless save on offshore collateral, transaction costs and financial outflows; hinting that foreign exchange benefit will be incremental.

Genesis

The seeds of the present proposal were sown in 2015 at the time of the merger of the Forward Markets Commission with SEBI, which has been taking measured steps in developing commodity derivatives market in an orderly manner.

To attract broad-based participation, enhancing liquidity, facilitating hedging and bringing in more depth to the commodity derivatives market, SEBI had introduced various products such as futures on commodity indices, options on commodity futures and options in goods.

The products have since been launched by bourses and are witnessing substantial trading volumes, thanks to mutual funds, alternate investment funds (AIFs) and portfolio management services.

Initially, the eligible foreign entities (EFEs) were allowed to participate (hedge) only if they had a direct exposure to Indian physical commodities, but their response was woefully low due to the additional documentation requirements and operational complexities.

Potential

Citing a study in China, which found a jump in volume and deals amid largely unaffected trading costs after the internationalisation of futures markets; SEBI reasoned that the entry of FPIs can be considered.

By attracting global capital, Indian exchanges could gradually become more influential in regional price discovery, as a deeper market can also reduce the country’s dependence on the overseas benchmarks.

Although the politically sensitive farm sector has been excluded from the proposed FPI regime, improved liquidity and better price discovery can provide a long-term institutional foundation for agricultural commodity markets, which indirectly helps NCDEX (National Commodity & Derivatives Exchange).

But SEBI’s present focus is expected to benefit the MCX — dominated by commodities that are either imported or globally priced. It helps expand the addressable market and strengthen its position as an Asian commodity trading hub, joining China, Japan, the U.S and Europe, where FPIs already take part in physically settled derivatives.

The combined futures and options ADT of MCX had seen a whopping 238% increase in Q1FY27, reflecting growing investor adoption of commodity derivatives for hedging and trading.

Active client base almost doubled year-on-year to 13.72 lakh in the review period, mainly on the back of growing retail and institutional interests.

Concerns

The SEBI’s move to widen access for FPIs into non-agricultural commodity derivatives is a significant step, but speculation may amplify price movements in an otherwise charged geopolitical environment, currency fluctuations and supply disruptions.

Large international commodity trading houses and hedge funds could accumulate significant positions, potentially influencing short-term prices, even as SEBI has mandated them to square off positions before the delivery period.

Potentially, reflecting the contagion from global markets, Indian commodity markets may sway to Federal Reserve policy as well as the dollar movements.

Excessive financialisation of commodities may create a discord between futures prices and physical market realities.

Pivotal points

FPIs are not inherently destabilising, while their impact depends on whether they add liquidity and information or merely add speculative leverage.

Commodity markets involve multiple regulatory and institutional layers, calling for harmonisation of rules on taxation, reporting, settlement, and foreign exchange (forex) regulations.

The key point is that FPIs may not immediately multiply turnover, but they can significantly improve market depth, open interest and institutional participation, which are currently the missing links.

However, FPIs’ shift to India depends on several factors, including contract design, liquidity, ease of capital movement, taxation clarity, regulatory stability and international connectivity.

Its success will depend not merely on attracting foreign capital but on building robust safeguards — strict position limits, real-time surveillance, margin discipline and transparency in trading.

Published - August 17, 2026 11:38 am IST