14 February 2015


Government seems to have  learnt  from  Rs. 5600 cr scam in NSEL ( National Spot Exchange) . After  the NSEL scam the turnover in the commodity exchanges has gone down drastically . For growing economy like India , we cannot afford the same.  In commodity exchange in the need of the hour is  right price discovery for the commodities that are being traded , however   due the reduced turnover market lacks depth and the objective is  not achieved.
Control of FMC shifted to finance ministry
The important step that has been taken  is the control of FMC (  Forward Market Commission )  the regulatory body of commodity exchanges has been shifted from consumer affairs ministry to finance ministry , however still lacks administrative free dom. The ultimate aim should be all the exchanges be it commodity , equity , currency should  be brought under the control of SEBI  with  requisite authority for effective  control , monitoring and prevention of scams .
Enhancing liquidity
FMC is considering   to introduce  “ market makers “  to  increase  turnover.  The price is the resultant  of trading which is outcome of supply and demand forces./  For this it is going to introduce  “ liquidity enhancement mechanism “ ( LES ) to encourage the brokers to participate activity and this create market makers.  Market maker is a  broker-dealer firm that accepts the risk of holding a certain number of units ( contracts)  of a particular commodity  in order to facilitate trading in that commodity  Each market maker competes for customer order flow by displaying buy and sell quotations .
Entry of FIIS and  commercial banks
The cost of transactions  in commodity market is high , in order to address this problem RBI is considering to allow the FIIs ( Foreign Institutional  Investors) and commercial banks to trade in commodity markets , this will serve the dual purpose  of  increasing the turnover in the market and  bring the cost of transactions down.  With increase turnover the will also serve the objective of right price discovery. At present commercial banks are not allowed to trade in commodity market under  Banking Regulation Act . However  government is considering amending the act  so that banks can participate in this market.  This will make the commodity exchange more live and active which had gone into huddle after NSEL scam broke out.
The flip side of FIIs participation
The FIIs have got massive financial power and the same has been demonstrated in the equity market  Indian stock market is virtually controlled by FIIs.  This may lead to  volatility  in commodity  spot prices and can  be serious cause of concern especially for agricultural commodities . Hence RBI and government  should strike the balance by equal participation by commercial banks and domestic financial institutions so that volatility   can be reduced to large extent and FIIs do not take the control of commodity markets .
Overall  it is  good that government  had decided to reform  the commodity markets as well , however  it  should be done with cautious and long term beneficial approach to benefit our economy

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