India aims to revolutionize its agricultural market with a major reform of derivatives

India's financial markets regulator, the Securities and Exchange Board of India (SEBI), on Tuesday proposed a series of measures aimed at boosting liquidity in the agricultural derivatives market, with the goal of attracting more investors and stimulating trading.

Among the main reforms under consideration is the introduction of a transitional cash settlement system for certain agricultural contracts. These contracts could initially be settled financially before transitioning to physical delivery of goods once certain thresholds are reached.

In India, commodity derivatives contracts are generally contingent on the physical delivery of the commodities involved. According to SEBI, this requirement sometimes complicates transactions and limits investor participation by reducing market liquidity.

The regulator is considering including agricultural products such as corn, peanuts, and chili peppers in this pilot project. The thresholds for switching to physical delivery would be determined based on the average daily trading volume, open positions, or a maximum period of two years after the contracts' launch.

SEBI, however, insisted that this was not an abandonment of the principle of physical delivery, with cash payment being presented as a temporary solution intended to facilitate market development.

In a separate document, the Indian authority also proposed easing position limits on agricultural derivatives. For commodities with a direct impact on inflation, these limits could be raised to 0,5%, up from the current 0,25%. Other widely traded commodity categories could see their ceilings increased to 1% and 2%.

The regulator also wants to cap the penalties related to exceeding position limits on agricultural products, whereas no maximum limit currently exists.

These proposals are part of a broader effort by Indian authorities to make commodity markets more attractive, particularly for institutional investors. Reuters had already revealed in December that a committee mandated by the SEBI was preparing recommendations aimed at relaxing the rules governing these markets.