In today’s Finshots, we do a simple explainer on India’s first domestic benchmark-linked gas futures and whether they can succeed where commodity liquidity has long struggled.

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Now onto today’s story.

The Story

Gas prices have risen sharply. You know this because you feel it in your kitchen. Buying a cylinder costs a few hundred rupees extra now. But what if you had a way to protect yourself from this price rise?

Like a contract where you agree to buy gas at a fixed price, say ₹900 per cylinder, for the next 12 months, regardless of what happens to prices. This means that if the US-Israel versus Iran war drags on and gas prices rise further, you don’t have to worry as you’ve already locked in your cost. But if prices fall, you’re stuck paying ₹900. Still, you might take that risk if you believe that prices are more likely to rise than fall. And if this contract were tradeable on a stock exchange, it would be called a futures contract — a type of derivative whose price is linked to an underlying asset, in this case, gas.

Now, nothing like this exists in reality for you as a household consumer. But it will soon be available for gas-linked businesses. Think producers like ONGC, Indian Oil, and Reliance Industries; city gas distributors like Gujarat Gas and Indraprastha Gas; gas linked power generators; large industrial users like those in steel, textile and glass sectors; and even traders and investors who want to profit from gas price movements.

That’s because a couple of days ago, NSE got the go-ahead from market regulator SEBI to launch “natural gas futures” contracts tied to India’s own gas-price index called GIXI (Gas IndeX of India). This index is created by the Indian Gas Exchange (IGX) and is a first for any Indian exchange.

If that sounds complicated, it’s essentially a derivative product like we explained at the start, which tracks the price of Indian natural gas using GIXI. And unlike other commodity futures in India, which rely on physical commodities or global benchmarks, GIXI is based on actual trades within India across six regional hubs. This gives businesses a more relevant way to hedge against domestic gas price swings, instead of relying on foreign benchmarks or fixed-price contracts.

And that might make you think, “That’s great! Businesses dislike price uncertainty anyway. So gas futures let them lock in prices today and reduce risk.”

While that’s true, it’s not like this wasn’t possible before. Companies could hedge using global benchmarks like the US-based Henry Hub or Europe’s TTF. But the problem was that Indian gas prices don’t move in sync with these benchmarks. That’s because India has its own currency swings, LNG (Liquefied Natural Gas) import costs, regulations, and supply-demand constraints. So even if global futures moved up or down, a company’s actual exposure in India didn’t quite match. This gap or the mismatch between the hedge and the real-world price you care about, is called basis risk in derivative hedging terminology.

And that’s exactly what India’s first domestic-benchmark gas futures aim to fix. They allow sellers like ONGC to lock in a selling price, buyers like Mahanagar Gas to lock in a buying price, and industrial users to limit the impact of gas price spikes on their margins.

But there’s a catch. Futures markets work only if there are enough buyers and sellers. Otherwise, prices can become noisy or easy to manipulate. And India has struggled with this for decades, which is why a domestic benchmark-based derivative hasn’t really taken off, apart from those linked to metals or agricultural commodities (If you read our Markets edition on copper ETFs last week, you might already know this).

So the next question is, why have Indian commodity contracts struggled with liquidity?

After all, NSE is currently the world's largest derivatives exchange by contract volume and ranks third globally in equity trades. So what’s the problem with commodities?

Well, the thing is, many Indian commodity users are small traders, SMEs (small and medium enterprises), farmers, or even local buyers who might not be comfortable using something as complex as futures to hedge their prices. Besides, they could be intimidated by margin calls (the requirement to fund your account if prices move against you), leverage, and mark-to-market (daily settlement) losses. So despite real hedging demand existing, much of it remains scattered and underdeveloped, with many relying on informal contracts instead.

The other issue is that Indian commodity derivatives have often faced regulatory and policy uncertainty. Despite India’s commodity derivatives market existing since 1875, the journey hasn’t been smooth. Futures trading was banned during World War II, briefly resumed in the 1950s, and then banned again in 1966. For decades after that, trading was limited to a few agricultural commodities. It was only in the early 2000s that futures trading was reintroduced across a wider range of commodities. For years, the market was regulated by the Forward Markets Commission (FMC). But concerns around price manipulation, weak regulation, and scams led to stricter oversight. And not long ago, in 2015, the government merged the FMC with SEBI, bringing commodity markets under a more unified regulatory framework. These regime changes along with tax shifts, position-limit tweaks, and margin hikes put together, have discouraged institutions from building long-term hedging strategies, due to the risk of sudden policy shocks mid-trade. The end result is that broader participation and market depth have struggled to develop.

And finally, India’s retail trading culture is heavily skewed towards equity indices like the Nifty and Sensex. Within derivatives, index products are far more liquid, drawing most of the attention. Which explains why India leads in derivatives volume but still lacks depth in commodity markets.

That’s unlike global commodity derivatives markets, where a few key things are usually true.

To begin with, markets like the US, Europe, and China have large producers, processors, and export-import chains, all of whom need to hedge price risk. These players are run by professional treasurers and risk-management teams that use futures as a core tool, unlike the smaller companies and farmers in India.

This creates deep and sophisticated pools of liquidity, allowing participants to continuously provide buy and sell quotes and keep bid-ask spreads (the difference between the highest price a buyer is willing to pay or the bid and the lowest price a seller is willing to accept or the ask) low.

There’s also long-term institutional participation, where large pension funds, sovereign wealth funds, and others hold commodity futures for portfolio diversification, adding another layer of stability to liquidity.

As a result, other markets, especially emerging ones like India, start relying on these global benchmarks. Volumes attract more volumes, making these benchmarks increasingly important and their futures markets hard to ignore.

This gap explains why commodity-linked contracts in India often start with fanfare, see thin volumes, and eventually get sidelined by regulators or exchanges or reworked, without evolving into long-term reference benchmarks.

So how does this new NSE-IGX gas futures project change that core problem, you ask?

Well, it would be a bit flattering to say that there’s a grand plan and things will change overnight. But there are a couple of reasons this might actually work and bring in the volumes needed to deepen the market.

The first, as we’ve already mentioned, is that NSE is the world’s largest derivatives exchange by contract volume, with a massive base of brokers, institutions, and retail investors. Which means IGX’s physical gas prices can now plug into NSE’s derivatives ecosystem, where the financial side can provide the liquidity. And that, in turn, allows actual gas businesses — buyers, suppliers, and distributors, to hedge in a market that’s liquid enough to matter.

The second is a broader shift already underway. India is actively trying to increase the role of natural gas in its energy mix, with a target of raising its share to 15% by 2030 from about 7% today. That means more pipelines, more city gas networks, and more investment overall. And when that kind of expansion happens, investors naturally want a clear, liquid domestic price benchmark to manage risk. That’s where GIXI-linked futures could start becoming relevant.

So yeah, if India’s gas economy keeps growing and more participants come in, GIXI could slowly turn into a recognised reference. And let’s hope that’s exactly what happens rather than these gas futures ending up in a quiet corner of NSE’s commodity book with low volumes, joining the graveyard of underused commodity futures contracts.

Until next time…

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