It seems time has come for foreign institutional investors and mutual funds to trade in bullion and energy Futures on commodity exchanges in India.

If the mood in the finance and agriculture ministries is any indication, the government will, in all likelihood, allow FIIs and MFs to trade in bullion and energy Futures on commodity exchanges.

According to officials, the finance and agriculture ministries have finally come to an agreement on the proposal.

According to officials, the participation of FIIs and MFs is expected to lend depth to trades in these areas.

FII and MF investments in commodity exchanges will fall under the purview of the Sebi, while the forward markets commission regulates the exchanges.

Various provisions of the Sebi Act would be amended to facilitate FII and MF trading these two areas.

The government is of the view that permitting them in bullion and energy Futures would not add to inflationary pressure, since both are narrow commodities that did not impact the wholesale price index, unlike agriculture commodities.

It is based on the logic that it would help arbitrage, contain intra-day price volatility and bring expertise into the sector. Inflationary concerns would be addressed by the FMC putting in place curbs depending upon the volume of trade, said an official.

The bullion and energy Futures market in India is estimated to be around Rs 7,000 crore (Rs 70 billion). There is a considerable interest in the bullion trade in India. For example, commodity exchange MCX is already the world's third largest bullion exchange, with average daily trades of Rs 5,000-5,500 crore (Rs 50 to Rs 55 billion).

However, in terms of trading volumes, MCX is just 10 per cent of NYMEX and 25 per cent of TOCOM, the first and second leading bullion exchanges in the world.

However, some analysts believe that the entry of FIIs and MFs is unlikely to impact commodity exchanges in the short term.