Indian market regulation and FPI participation

The Securities and Exchange Board of India (SEBI) has highlighted both the risks and the strategic opportunities within the Indian financial markets. In its annual report, SEBI projected market resilience for 2026-27, supported by strong GDP growth projections, despite noting that geopolitical tensions and high crude oil prices pose risks to inflation and the current account deficit.

While the market previously faced challenges from significant foreign portfolio investor (FPI) outflows and rupee depreciation, SEBI is moving to deepen institutional involvement. Building on previous proposals to expand FPI access to exchange-traded commodity derivatives, SEBI is now specifically proposing to allow FPIs to trade physically settled non-agricultural commodity derivatives, including crude oil, natural gas, gold, and silver. To manage physical delivery obligations, the regulator suggests safeguards requiring FPIs to exit or roll over positions before delivery periods begin.

Further regulatory reforms include expanding the Accredited Investor framework, potentially increasing the eligible pool to 400,000 by including securities market assets as a criterion. In the SME sector, SEBI is considering raising the market capitalization limit for IPO listings to ₹4,000 crore and removing minimum trade size requirements to enhance liquidity.

Regarding market stability, SEBI Chairman Tuhin Kanta Pandey stated that “no manipulation has been observed” in newly introduced closing auction sessions, noting the system is designed to benefit passive investors. Additionally, the regulator has lowered the Z-score limit for stress testing in commodity derivatives from 10 to 5 to facilitate ease of doing business. SEBI is also expected to release findings regarding retail investor losses in the derivatives market in the near future.