Commodity Derivatives: Why India’s new financial law feels like the 1970s

India’s proposed Securities Markets Code promises regulatory convergence, but its treatment of commodity derivatives revives decades-old state control. By preserving discretionary government powers, the Bill risks stifling price discovery, hedging, and market credibility in a modernising financial system.

India’s financial markets have travelled a long distance from the era of licences, quotas, and price controls. Liberalisation dismantled many of the barriers that once distorted capital allocation and market signals. Yet, every so often, echoes of that past return—subtly embedded in new legislation, cloaked in modern language. The proposed Securities Markets Code (SMC), tabled in Parliament by Finance Minister Nirmala Sitharaman, is one such moment.

On the surface, the SMC represents a bold and welcome consolidation of India’s fragmented securities laws. It seeks to bring equity markets and commodity derivatives under a single legal framework, regulated by the Securities and Exchange Board of India (SEBI). This convergence, in principle, should reduce regulatory arbitrage, lower compliance costs, and encourage cross-asset participation.

But beneath this progressive façade lies a troubling continuity. The Bill preserves—and arguably entrenches—the Indian state’s long-standing discretionary control over commodity markets. In doing so, it risks importing a distinctly 1970s mindset into a financial system that otherwise aspires to global standards of transparency, predictability, and market-driven governance.

Why commodity derivatives matter

Commodity derivatives are not speculative excesses; they are foundational instruments of a modern economy. They allow producers, processors, traders, and consumers to hedge against price risk. A farmer can lock in a future selling price, a manufacturer can stabilise input costs, and an investor can express a view on supply-demand dynamics.

More importantly, a liquid derivatives market performs a crucial informational role. By aggregating diverse expectations about future prices, it generates transparent, forward-looking benchmarks. These benchmarks influence spot prices, guide cropping and production decisions, shape inventory management, and reduce volatility across the real economy.

In short, a healthy commodity derivatives market is not merely desirable—it is indispensable for clear price discovery. Any law that constrains its development does not just affect traders on an exchange; it distorts signals for farmers, industries, and consumers alike.

A legacy of state control

India’s suspicion of commodity markets is not new. State control over commodities dates back to World War II, when the colonial government imposed restrictions to manage wartime shortages. Post-Independence, instead of dismantling these controls, the Indian state institutionalised them through the Essential Commodities Act (ECA) of 1955.

The ECA empowered both central and state governments to regulate production, storage, distribution, and pricing of goods deemed “essential.” Over time, this authority translated into an expansive toolkit: stock limits, price ceilings, movement restrictions, compulsory procurement, and export bans. Violations were often criminalised, reinforcing a climate of fear and uncertainty.

While the original justification was equitable distribution during scarcity, the rationale evolved with political priorities—foreign exchange management in the 1970s, anti-profiteering drives in the 1980s, and inflation control in more recent decades. Commodities as varied as onions, jute, petroleum, and pulses have fallen under these controls.

Historians such as Ritu Birla and Rohit De have noted a paradox: independent India frequently enforced these colonial-era controls more aggressively than the British. This dirigiste instinct has left a lasting imprint on India’s commodity ecosystem.

The SMC and regulatory convergence

The SMC’s most compelling promise is regulatory continuity. Since 2015, India has pursued a policy of consolidating all secondary market trading—equities and commodity derivatives—under SEBI. A single regulator, in theory, ensures uniform standards, reduces overlaps, and simplifies compliance.

For equity markets, this framework has worked reasonably well. SEBI follows transparent, rule-based criteria to determine which stocks are eligible for futures and options (F&O) trading. Market capitalisation, liquidity, and turnover guide inclusion and exclusion. Stock exchanges apply these objective metrics with minimal discretionary interference.

This predictability is precisely what has enabled India’s equity derivatives market to scale, deepen liquidity, and attract global participation.

Where the Bill falters

The problem is that the SMC does not extend this rules-based logic to commodity derivatives. Instead, it empowers the central government to notify which commodities may be traded in derivative markets, albeit “in consultation with SEBI.”

This seemingly minor provision has far-reaching implications. It effectively splits regulatory jurisdiction between SEBI and the government—replicating a model seen in Indian banking, where overlapping authority has often produced sub-optimal outcomes.

Crucially, the Bill does not mandate any objective, transparent framework for declaring commodities “eligible” for derivatives trading. There are no liquidity thresholds, volume benchmarks, or volatility parameters. Eligibility becomes a matter of administrative discretion rather than market logic.

The parallels with the now-defunct Controller of Capital Issues are hard to miss. Just as the state once decided which companies could raise capital and at what price, it now reserves the power to decide which commodities deserve a derivatives market. This is a regression, not reform.

The cost of unpredictability

Discretion breeds uncertainty. A commodity permitted for futures and options trading today could be withdrawn tomorrow by executive fiat. Such unpredictability discourages participation, deters long-term hedging strategies, and undermines investor confidence.

These risks are amplified by the Bill’s broader architecture. The SMC grants SEBI wide powers to issue directions “in the interest of development of the securities market,” while simultaneously allowing the government to issue binding directions to SEBI in the “public interest.” Together, these provisions create a layered opacity that markets struggle to price in.

For commodity derivatives—already vulnerable to political sensitivities around inflation—this framework all but guarantees intermittent intervention.

A ban that backfired

These concerns are not theoretical. They are borne out by recent experience. In December 2021, SEBI suspended futures trading in seven major agricultural commodities, citing the need to control food inflation. These commodities accounted for over 70 per cent of trading volumes.

The ban reflected a deeply held belief in New Delhi: that speculative activity in derivatives markets spills over into spot prices at local mandis. Whether inflation control even falls within SEBI’s remit remains debatable. Nonetheless, the ban was imposed—and continues to this day.

The outcomes have been sobering. Empirical analysis of month-on-month food inflation over the past 12 years shows little change in volatility patterns post-ban. Price spikes persisted, including a sharp surge in June 2023—well after futures trading was halted.

Conversely, the dramatic fall in food inflation in late 2025, which dragged headline CPI down to 0.5 per cent, occurred without any help from a functioning futures market. The evidence suggests the ban neither tamed inflation nor stabilised prices.

Who really paid the price

While consumers saw no lasting benefit, producers bore the hidden cost. By eliminating futures markets, the state removed a critical price-discovery mechanism. Farmers were left without forward-looking signals to guide sowing decisions or protect against downturns.

When spot prices collapsed, producers had no hedging tools—ironically exposing them to the very volatility that state intervention purported to prevent. The ban blinded the agricultural economy at precisely the moment it needed clarity.

This episode underscores a recurring lesson: suppressing market signals does not solve underlying problems. It merely destroys the information required to manage them.

A test of credibility

As SEBI prepares to review the agricultural futures ban in March 2026, the stakes extend beyond economic efficiency. Regulatory credibility is on the line. Markets can adapt to strict rules; they cannot function under arbitrary ones.

The SMC, in its current form, risks locking India into a cycle of ad hoc interventions—especially in politically sensitive commodities. That would undermine the very objectives of consolidation and modernisation the Bill claims to advance.

The Securities Markets Code should be more than a legislative merger of outdated laws. It should represent a philosophical shift toward rule-based, market-oriented governance. Instead, by preserving discretionary state control over commodity derivatives, it revives the ghost of the Commodities Controller.

Decades of intervention have already weakened India’s commodity markets. Extending this control to derivatives makes even less sense in a liberalised economy. If India truly aspires to be a global financial centre, it must trust markets to generate information—and resist the urge to manage prices by decree.