In a move that could reshape India’s commodity markets, the Securities and Exchange Board of India (SEBI) has announced plans to work with the government to permit banks and pension funds to participate in commodity trading. The reform is aimed at deepening market participation, boosting liquidity, and making India’s commodity ecosystem more robust and globally competitive.

Currently, participation in commodity derivatives is limited to certain investors, with restrictions on banks, pension funds, and large institutional players. By allowing these entities into the market, SEBI aims to bring more depth and stability, reducing volatility caused by speculative trading. Institutional investors typically adopt a more long-term approach, which is expected to improve efficiency and transparency in price discovery.

The proposal also includes allowing Foreign Portfolio Investors (FPIs) to trade in certain non-agricultural, non-cash settled derivatives contracts. This could significantly increase foreign inflows into the commodity market, particularly in sectors such as energy, metals, and industrial raw materials.

The announcement has already had a positive impact on the markets. Shares of the Multi Commodity Exchange (MCX) surged over 4% after the news, as investors anticipate higher trading volumes and improved business prospects. Analysts believe that with greater institutional participation, commodity trading will become a more attractive asset class for hedging and portfolio diversification.

For pension funds and banks, this reform opens new avenues of investment. It allows them to balance portfolios with exposure to commodities, which are often seen as a hedge against inflation. Moreover, the move aligns with India’s broader goal of developing deeper capital markets and strengthening its financial sector.

If implemented smoothly, this regulatory shift could transform the commodity derivatives landscape, making India not just a participant but a leader in global commodity trading.