Sebi Wants to Fix a Silent Problem in Agri Commodities Markets
India grows everything from maize and groundnut to chilli and cotton. But strangely, many agricultural commodity futures contracts barely trade.
Low volumes. Weak participation. Poor liquidity.
And now, Sebi thinks it may have found a workaround.
The problem with agri commodity trading
Most agricultural commodity derivatives in India are designed for physical settlement.
That means if you hold the contract till expiry, you may actually have to deliver or receive the commodity physically.
Sounds fine in theory.
But in reality?
It scares away traders and speculators during the early stages of a contract launch.
Why?
Because physical settlement comes with operational complexity:
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Warehousing requirements
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Quality testing and assaying
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Delivery logistics
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Location constraints
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Higher compliance burden
And when participation stays low, liquidity never builds.
That creates a vicious cycle:
Low liquidity → fewer traders → even lower liquidity.
Sebi’s new proposal
Sebi now wants to experiment with something simpler.
The regulator has proposed allowing select agricultural commodity F&O contracts to begin as cash-settled contracts before later transitioning into mandatory physical settlement.
In simple words:
Instead of delivering actual maize or chilli, traders would initially settle profits and losses in cash.
Only after the contract becomes sufficiently liquid would exchanges shift it to physical settlement.
Think of it as giving a new contract “training wheels” before forcing it into the full delivery system.
Why this matters
Liquidity is everything in derivatives markets.
Without enough buyers and sellers:
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price discovery weakens
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spreads widen
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institutional participation falls
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hedging becomes inefficient
Sebi believes cash settlement could help new contracts gain traction faster.
The regulator even acknowledged that despite improvements in warehousing infrastructure, utilization remains limited for several commodities.
So the issue is not just infrastructure.
It’s participation.
Which commodities could be included?
Sebi suggested a pilot framework for select commodities such as:
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maize
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groundnut
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chilli
These contracts could first operate as financially settled products and later move to compulsory physical settlement once predefined thresholds are met.
Those thresholds may include:
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average daily traded volume
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open interest levels
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or completion of a two-year period
Another important proposal hiding in the background
Alongside this, Sebi has also proposed doubling client-level open position limits across categories of agricultural commodities.
That could allow traders to take larger positions in agri derivatives markets.
And that matters because position limits often become a bottleneck for institutional participation and liquidity creation.
Who could benefit from this?
If Sebi’s proposal gets implemented successfully, several players across the commodity ecosystem could benefit:
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Commodity exchanges like MCX and NCDEX could see higher trading activity and better liquidity in agri contracts.
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Brokerage firms may benefit from increased participation from traders and institutions.
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Agri trading companies and processors could get better hedging opportunities.
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Warehousing and assaying companies may eventually benefit once contracts transition to physical settlement.
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Farmers and agri businesses could indirectly gain from improved price discovery and deeper commodity markets.
In short, the move could help revive interest across India’s agricultural derivatives ecosystem.
The bigger picture
India wants deeper commodity markets.
Especially in agriculture — a sector that still suffers from fragmented pricing and inefficient risk management.
If Sebi’s pilot works, exchanges could finally revive dormant agri contracts that struggled for years under the weight of physical settlement requirements.
Because sometimes, markets don’t fail due to lack of demand.
They fail because the entry barrier is simply too high.