SEBI's proposal to open commodity markets to institutional investors.

On September 17, 2025, the Securities and Exchange Board of India (SEBI) signaled a potential reshaping of the country’s commodity derivatives market. In a public statement, SEBI Chairman Madhabi Puri Buch’s successor, Chairman Pandey, announced that the regulator will engage with the central government on permitting banks and pension funds to participate directly in commodity derivative trading.

The plan, if approved, would also extend to foreign portfolio investors (FPIs), allowing them to trade in non-cash-settled, non-agricultural commodities. Together, these measures mark one of the most significant steps toward institutionalising India’s commodity markets since their integration into SEBI’s regulatory ambit in 2015.

“Commodity markets need the depth and discipline that only large institutional players can bring,” Pandey said, outlining the rationale behind the proposals.

Why Institutional Entry Matters for Commodity Markets

Commodity derivatives in India have long been dominated by individual traders, hedgers, and corporate treasuries, with limited participation from large financial institutions. This has constrained liquidity, led to price volatility, and kept market depth well below global benchmarks.

By opening the door to banks, pension funds, and FPIs, SEBI aims to:

• Infuse liquidity: Large-volume trades from institutions can create continuous pricing and narrow bid-ask spreads.

• Enhance stability: Pension funds and banks typically adopt long-term strategies, tempering speculative swings.

• Diversify risk management: Commodity exposure could complement equity and debt holdings, strengthening portfolio resilience.

• Align with global practice: Major commodity markets like Chicago and London have long relied on institutional participation.

Regulatory Shifts in Context

This proposal is consistent with a broader trend of SEBI and the Finance Ministry gradually mainstreaming alternative asset classes. Recent reforms have already permitted:

• Alternative Investment Funds (AIFs) to access commodity derivatives.

• Insurance companies to invest in select commodity-linked instruments.

• FPIs to participate in cash-settled commodity derivatives.

The current move extends that trajectory, broadening participation to the largest pools of capital in India—banks and pension funds—while expanding FPIs’ access beyond cash-settled products.

Potential Impact on Market Dynamics

The entry of institutional investors into commodities could recalibrate the market in multiple ways:

• Pricing Efficiency: More players with sophisticated models could lead to fairer price discovery, reducing arbitrage opportunities.

• Risk Transfer: Producers and consumers of commodities would gain more reliable counterparties for hedging, strengthening India’s resource economy.

• Product Development: Broader participation may encourage exchanges to innovate in instruments, particularly in metals, energy, and infrastructure-linked commodities.

• Global Linkages: Allowing FPIs greater access integrates India’s commodities market more closely with global trading flows.

Challenges and Caution Points

Despite its promise, the proposal raises regulatory and systemic questions:

• Systemic Risk Exposure: Banks entering speculative markets must maintain strong risk controls to avoid balance-sheet shocks.

• Pension Fund Mandates: Trustees will need to weigh commodity exposure against their fiduciary duty to preserve stable, long-term returns.

• Regulatory Coordination: Any expansion requires alignment between SEBI, the Reserve Bank of India (RBI), and the Pension Fund Regulatory and Development Authority (PFRDA).

• Market Readiness: Commodity exchanges will need to upgrade surveillance and clearing mechanisms to handle institutional-scale trades.

Broader Implications for Indian Finance

The move reflects an ongoing shift in India’s financial regulation towards liberalisation with safeguards. Just as equity and bond markets benefited from foreign and institutional participation in the 1990s and 2000s, commodity markets are now poised for a similar transition.

For policymakers, the reform represents a balancing act between market efficiency and systemic prudence. For investors, it could open new avenues of diversification and risk management. And for Indian commodities—from energy and metals to infrastructure-critical resources—it promises greater integration with global finance.

Conclusion: A Reform with Structural Consequences

SEBI’s proposal to allow banks, pension funds, and FPIs into commodity derivatives is more than a technical rule change—it is a signal of India’s intent to modernise its markets and broaden participation. If implemented, it could transform commodities from a niche, volatility-prone segment into a mainstream asset class accessible to the country’s largest institutional investors.

The final outcome will depend on government concurrence and inter-regulatory coordination, but the direction is clear: India’s commodity markets are on the verge of a new institutional era.