India permits commodity derivatives in bamboo, cashews, weather, and 10 others

Earlier this month, the Ministry of Finance (MoF) of the Government of India (GoI), notified the trading of several new commodities derivatives under the Securities Contracts (Regulation) Act, 1956.

The GoI’s decision is intended to enable better price discovery in these markets while improving access to much-needed risk management tools for both businesses and farmers in the world’s fastest-growing economy.

The introduction of additional hedging facilities and the expected higher volumes of liquidity are likely to bolster confidence in India’s evolving financial markets framework.

However, the actual roll-out of tradable derivative instruments shall require an application by the respective exchange and the final approval of the regulator.

The MoF's notification only enables the new categories to be eligible for roll-out.

New entrants

The updated list of commodities released by the MoF in consultation with the Securities Exchange Board of India (SEBI) now also includes apples, bamboo products, bitumen, cement, cashews, freight (including airways, trucking, and shipping), garlic, manganese, palladium, skimmed milk powder, timber products, white butter, and weather; totalling 104 categories, up from 91.

These commodities were selected for inclusion partly because many of the underlying markets already benefit from robust supply-demand dynamics.

In addition to the above-mentioned items, commodity derivatives of the alloys of aluminium, copper, lead, nickel, and zinc, metals that were already part of the list, are also now permitted.

Broader push

The MoF, GoI is seeking to streamline the ecosystem around price discovery and market opportunities in the commodities space.

In October 2023, the now second-largest commodities exchange in the country, the National Stock Exchange (NSE) rolled out derivatives contracts in a variety of segments including gold, silver, copper, WTI, and natural gas.

Such steps shall enable parties to protect themselves against price risks, market volatility, and unforeseen events, while likely proving central to the country’s roadmap for becoming a major player in global manufacturing.

However, given the uneven history of the segment which has often attracted government bans and other restrictions, markets may continue to wait and watch to see how well these new categories gain traction among traders.

Following rising inflation concerns around key food items in the post-pandemic period, trading in several agricultural derivatives including rice and wheat has been suspended until December 2024.