India's Agri Markets Have a Silent Problem — And the Regulator Just Moved to Fix It

Reviewed by Kanishk Dev Bangia, NISM Series XV Certified Research Analyst

Last Updated: May 2026 | Reg. No: NISM-202300182946

India Grows Everything — So Why Don't Agri Markets Trade?

India is one of the leading producers of agricultural commodities like maize, groundnut, chillies, cotton, and others. India also has a good infrastructure for commodity exchanges. But an irony is, the majority of agricultural commodity futures listed at Indian exchanges see little action.

Small volumes. Small participant base. Non-performing contracts.

The issue isn't a recent development. The problem has existed for long. But there is finally a solution to this problem, proposed by India’s capital markets regulator.

This post discusses, in detail, about the problem and the solution proposed to overcome the same.

1: Understanding the Problem — Physical Settlement

Futures on Commodities

Futures Contracts are contracts between two parties wherein one party agrees to purchase or sell a certain amount of commodities at a specified price in the future. There are two main functions of futures markets:

1. Hedging – The main reason farmers and other commodity traders use futures contracts is to secure themselves from risks of uncertainties.

2. Price Discovery – The process by which the price of the commodity is discovered by using factors like supply and demand as well as expectations.

In India, agricultural commodities futures are traded in commodity exchanges.

What Is Physical Settlement — And Why Is It a Problem?

Majority of agricultural commodities' future contracts in India have physical settlement arrangements. Physical settlement implies that should one choose to keep the contract until its expiration, they will have to receive/deliver the commodity.

While this may sound quite reasonable on paper, the practice brings about an array of issues making these contracts undesirable for many traders:

• The need for warehousing: Sellers have to organize accredited warehouses to hold their commodity.

• Quality control and assaying: The commodity needs to pass the required testing standards set by the exchanges.

• Logistics: Delivery to the exchange-sanctioned centers is a costly and complicated affair.

• Geographic limitations: Deliveries are possible only from those centers approved by the exchanges.

• More compliance procedures: There is an increase in the paperwork.

Therefore, while these types of contracts remain quite unappealing to many traders – both individual speculators and institutions alike – because they involve working with physical commodities.

The consequence? The lack of demand and thus – the lack of liquidity.

The Vicious Cycle of Low Liquidity

Low liquidity is self-reinforcing. Here is how the cycle works:

It is due to the same reason that most of the agricommodity future contracts in India, despite being listed in exchanges, do not experience any trade throughout a large period. The infrastructure might have developed, but participation remains an issue.

2: SEBI's Proposed Fix — 'Training Wheels' for New Contracts

What Has the Regulator Suggested?

The regulator has put forth a pilot framework whereby some selected agricultural commodities F&O contracts will be permitted to start off as cash settled contracts and will only move to become physically settled contracts after they have acquired adequate liquidity levels.

To put it simply, the trader will not need to deliver physical corn or chillies straight away; the contract will only be required to start off as being cash settled. In case the trade generates profits, the trader gets cash payments. Otherwise, cash losses are incurred.

Think of it as giving new contracts a simpler starting point — a way to build a community of traders and establish active pricing — before introducing the complexity of physical delivery.

Which Commodities Could Be Covered?

The proposal suggests starting with a pilot for select commodities. The commodities mentioned as candidates include:

When Does a Contract Switch to Physical Settlement?

In that regard, the proposal is not suggesting that cash settlement will continue forever. The contracts should be made to move to mandatory physical settlement upon reaching specific levels of threshold such as:

- Average Daily Traded Volume – A minimum volume per day to demonstrate active participation

- Open Interest Levels – A minimum volume of interest indicating the market depth.

- Time Duration – Completion of about two years as a cash-settled contract.

That is very important, as it is clear that the target here continues to remain market-making for physical transactions.

3: The Second Proposal — Larger Position Limits

Running alongside the cash settlement proposal is a second, equally important change: the regulator has proposed doubling client-level open position limits across categories of agricultural commodity derivatives.

As a result, raising these position limits will allow bigger players such as commodities trading firms, processors, and institutional players to take advantage of agricultural derivative markets.

Position limits are a hidden restriction on the market. If they are set too low, it means that the market is technically working, but it is shallow.

4: The Before vs After — What Could Change?

Here is a side-by-side view of how the agri commodity derivatives landscape could look, before and after this proposal is implemented:

5: Who Stands to Benefit — And How?

The successful implementation of the proposal is likely to result in numerous positive implications for various stakeholders within the commodities chain:

Agricultural Commodity Exchanges

Exchange markets dealing in agricultural commodity futures would experience increased trading volumes in contract types that had not been actively traded before. More transactions result in greater revenues from transaction fees, better market data services, and improved positioning within the commodities industry.

Trading Companies and Brokerage Firms

Higher involvement of retail and institutional customers will lead to higher broker fees. Trading firms offering commodities platforms will receive an opportunity to reinvigorate their agri F&O offerings.

Agri Trading Firms & Processors

Agri trading companies include commodity traders, food processing firms, export/import firms who should hedge against price risks. They currently prefer not to trade on exchanges due to problems with liquidity. More liquidity would mean better hedging and better prices.

Warehouse and Assaying Firms

After liquidity builds and physical delivery begins to happen through contract trading, the need for exchange-accredited warehouse services and assaying may rise, as it helps establish liquidity and deliverability.

Farmers & Agribusinesses

While indirect, it is perhaps the most significant potential benefit. Liquidity in the markets creates price signals which are reliable and accurate. Farmers can be sure of price discovery in commodity markets and can make informed decisions accordingly.

6: The Bigger Picture — Why India Needs Deeper Agri Markets

Agriculture forms a big portion of India's economic activity and employs a considerable number of its citizens. However, the existing system of risk management for agriculture – commodity derivatives – is underdeveloped, considering the significance of the industry.

This is mainly due to the lack of uniformity in prices. Various market segments, various grades and various locations all give rise to different prices for the same product. Such a lack of standardization leads to inefficiency, risk and uncertainty for each entity involved in the value chain.

Futures exchanges can solve this problem by creating one single price, through which farmers, traders and processors can make decisions on their activities. However, this process is only feasible if the market itself is liquid.

As stated in the proposal below, this condition is not automatic, but rather requires an effort to achieve.

Disclaimer

This is written for educational and informational purposes only. Nothing here constitutes investment advice or a recommendation to buy or sell securities. All data is sourced from publicly available information. Investments in securities markets are subject to market risks — please read all offer documents carefully before investing.