India’s commodity derivatives market, long constrained by regulatory caution and episodic bans, may soon see a structural overhaul. A high-level panel constituted by the Securities and Exchange Board of India (SEBI) is preparing to recommend a series of reforms aimed at reviving liquidity, restoring market confidence, and attracting institutional capital. According to multiple sources with direct knowledge of the discussions, the panel’s final report is expected to be submitted early next year.

The review comes at a critical juncture for India’s commodity ecosystem. Since 2021, derivatives trading in several essential agricultural commodities has been repeatedly suspended amid concerns that speculative activity could fuel food inflation. While these bans were intended as a consumer protection measure, they have also reduced market depth, weakened price discovery, and pushed participation towards informal channels.

SEBI’s stance appears to be evolving. Following the leadership transition in March, with former bureaucrat Tuhin Kanta Pandey assuming charge as SEBI chairperson, the regulator has already moved to liberalise equity market rules. Commodity derivatives now seem next in line. Pandey has publicly stated that strengthening India’s commodity markets is high on SEBI’s agenda, with an explicit focus on broadening participation and deepening liquidity.

At the heart of the panel’s recommendations is the proposal to lift the ban on derivatives trading in seven agricultural commodities, including paddy, wheat, and crude palm oil. These commodities are widely consumed and politically sensitive, which explains the regulator’s earlier reluctance to allow unfettered trading. However, the panel has reportedly examined historical price data and found that price trends in these commodities did not materially change either before or after the imposition of trading bans.

This empirical finding is significant. It challenges the long-held assumption that futures trading in agricultural commodities directly amplifies spot price inflation. Panel members have argued that derivatives markets largely serve as risk management tools rather than speculative drivers of price volatility. According to sources, SEBI’s internal management broadly agrees with this assessment, suggesting that the intellectual groundwork for policy reversal is already in place.

Beyond lifting bans, the panel is also recommending clarity on the tax treatment of commodity derivatives under the Goods and Services Tax framework. Currently, ambiguity around GST applicability and rates has been a persistent irritant for market participants, especially institutional and foreign trading firms. A clear tax definition could reduce compliance risk and improve the overall cost structure of trading commodities in India. Once the report is submitted, SEBI is expected to formally approach the government seeking amendments to the tax law.

Another key operational reform under consideration is the introduction of colocation facilities for commodity derivatives trading. Colocation, which allows trading firms to place their servers within exchange premises for faster access to market data, is already permitted in equity markets but remains prohibited in commodities. The panel has reportedly recommended allowing colocation, at least for metals and energy contracts, where global participation and algorithmic trading are already prevalent.

However, regulators appear cautious about extending this facility to agricultural commodities. Historical concerns around inflation sensitivity and public perception may lead to agri-derivatives being excluded from colocation access, at least in the initial phase. This calibrated approach suggests SEBI is attempting to balance market efficiency with political and macroeconomic sensitivities.

In addition, the panel is proposing margin reductions for agricultural commodity contracts to stimulate trading activity. High margins have often deterred genuine hedgers, particularly farmers’ collectives and small processors, from using exchange-traded instruments. Lower margins could improve accessibility, provided risk management safeguards remain robust.

Institutional participation is another central theme of the reform push. As reported earlier by Reuters, SEBI has been in discussions with the government and the Reserve Bank of India to allow banks, pension funds, and insurance companies to trade in commodity derivatives. These entities currently face regulatory barriers despite being natural long-term participants. Sources indicate that SEBI is waiting for the panel’s final recommendations before submitting a formal proposal to the RBI and the central government.