Role of Government in Commodity Markets: Regulations, Policies & Impact

Since the government and its decisions are a pivotal determinant of our economy, it is obvious that the role of government in commodity markets must be considered. So, regarding commodity market regulation, tariffs, import/export duties, government policies, and subsidies are important influencing factors.

Government’s Role in Commodity Markets

The government has two powerful ways to influence the commodity markets. These are through trade and monetary policies.

• Trade Policies and Commodity Markets: Trade policies include tariffs, quotas, and trade agreements that are aimed at either enabling international trade or restricting it. These can affect the commodities market and impact the prices of commodities like oil and precious metals. For example, higher tariffs on imported crude oil can lead to an increase in the price of crude oil investment assets.
• Monetary Policies and Commodity Markets: Monetary policy can also impact the prices of commodity assets like crude oil and precious metals (such as gold). For example, changes in the interest rates of centralised banks can lead to changes in the prices of such commodities. A lower interest rate means borrowing money to make commodities transactions becomes more prevalent and vice-versa.

Such is the role of regulatory authorities in commodities markets that sometimes, a lot depends on these regulations if you are a newcomer investor in the commodity markets.

Regulatory Bodies and Their Oversight

Besides the government, two major regulatory bodies can decide on commodity market regulations.

• Forward Markets Commission (FMC)

To understand the role of regulatory authorities in commodities trading, you should know that before 2015, the Forward Markets Commission (FMC) used to be the primary regulator. The FMC was responsible for maintaining integrity in commodities trading until it merged with the Securities and Exchange Board of India (SEBI) in 2015.

• Securities and Exchange Board of India (SEBI)

Since 2015, the Securities and Exchange Board of India (SEBI) has been the primary regulator of the commodities market. When it comes to commodity market regulation, the SEBI ensures fairness and integrity. So, every decision taken by the SEBI has a direct impact on the commodities market.

Other Policies and Subsidies

As a retail investor, you should also be aware of government policies on infrastructure and subsidies and environmental regulations that affect the commodities market.

• Infrastructure Policies: Besides the previously mentioned trade and monetary policies, infrastructure policies also impact the commodities market. For example, when it comes to trading in commodities like gold, good storage infrastructure may lead to hoarding and artificial price inflation.
• Government Subsidies: On the other hand, government subsidies on commodities like gold can lead to price reductions for retail investors. Hence, these policies play a crucial role in regulatory frameworks for commodities.
• Environmental Regulations: Certain environmental regulations can also affect the prices of commodities like crude oil. For example, stringent regulations on capping the production of crude oil can lead to reduced supply, thereby increasing the prices.

Conclusion

While such policy interventions can help stabilise the commodities market. However, excessive intervention may distort price signals, making it difficult for retail traders like yourself to predict market trends.