Sebi reviews non-agri commodity position limits to boost market liquidity

India's market regulator is reviewing position limits for non-agricultural commodity contracts in a bid to increase liquidity and depth in the country's derivatives market.

Speaking at a Commodity & Capital Market Participants Association of India (CPAI) event on Saturday, Sebi Chairman Tuhin Kanta Pandey said the regulator wants to help these contracts gain scale without compromising on risk controls. The move comes alongside several other planned reforms aimed at making India's commodity markets more attractive and less friction-prone.

Phased physical settlements

Among the key changes on the horizon is a shift in how physical settlement is handled for agricultural commodities. Pandey noted that forcing physical settlement from the very start of a contract can sometimes choke its development.

Instead, Sebi is looking at a phased approach. This would allow contracts to grow and mature before physical delivery becomes mandatory. The regulator has already completed its consultations on this matter and plans to issue formal guidelines soon.

"Technology can improve access and efficiency, but its design must reflect their needs while preserving fair access and market integrity," Pandey said, referring to the diverse mix of producers, commercial users, farmers, and physical hedgers who rely on these platforms.

Resolving tax friction

Sebi is also trying to iron out tax-related hurdles. The regulator is currently in talks with market participants over GST issues that affect buyers and sellers who trade physical commodities through exchange platforms.

At the same time, the regulator is pushing for deeper and more liquid cash markets. By encouraging wider participation, introducing stronger securities borrowing and lending mechanisms, and improving hedging and arbitrage options, Sebi hopes to improve price discovery. This, in turn, is expected to strengthen the link between cash and derivatives markets.

These regulatory changes follow a significant decision last month, when the Sebi board cleared a proposal to allow foreign portfolio investors (FPIs) to trade in physically settled, non-agricultural commodity derivatives, subject to certain safeguards.

Focus on education and compliance

To ensure retail and smaller participants are not left behind or exposed to risks they do not understand, Sebi plans to ramp up its "Project Jagrook" initiative. The campaign aims to educate farmers, farmer producer organisations (FPOs), small businesses, and hedgers about how derivatives work.

"Access without understanding is not inclusion," Pandey said, stressing the need for participants to understand both the utility and risks of these financial instruments.

However, the regulator made it clear that making things easier for traders does not mean it will go soft on compliance. Pandey stressed that strict controls over client funds, margins, reporting, and supervision remain non-negotiable to protect market integrity.