Derivatives trade now allowed in weather, cement and 11 commodities

The government has expanded the list of commodities permitted for derivatives trading to include weather, cement, and skimmed milk powder, according to a notification.

As per the notification issued by the Ministry of Finance’s Department of Economic Affairs on March 1, the Centre said it was expanding the list of commodities in consultation with the Securities and Exchange Board of India (Sebi).

A separate notification from the economic affairs department, also dated March 1, declared the items on the list as a “contract for the purchase or sale of a right to buy or sell, or a right to buy and sell in future, such underlying good, as notified under clause (bc) of Section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), as a derivative for the purposes of the said Act”.

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The expanded list now includes a total of 104 items, up from 91 before. The commodities that have been added include garlic, apple, manganese, palladium (including variants such as coins and bars), processed products of bamboo, processed products of timber, bitumen, cement, skimmed milk powder, white butter, cashew, freight including trucks, waterways, railways, airways, and weather.

It has also been specified that derivatives trading will also be permitted in alloys of five metals that are already a part of the list. These are alloys of nickel, zinc, aluminium, copper, and lead.

Derivatives trading is permitted in those commodities whose supply and demand is large, prices are volatile, have a long shelf-life, are capable of being standardised, and free of substantial control from government regulations.

While derivatives trading is seen as helping in effective price discovery of commodities and help producers hedge against potential price risks, critics also point out that it can influence prices in general. For instance, in December 2021, the government suspended trading in futures contracts of some agricultural commodities to reign in inflation. These included paddy (non-basmati), wheat, chana, mustard seeds, soya bean, crude palm oil, and moong.

While the suspension was for just one year, it has since been repeatedly extended, with Sebi saying in October 2023 that it would now apply till December 2024.