Professional Documents
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Summer Internship Project Report
Summer Internship Project Report
on
STUDY OF OPERTAIONS OF VARIOUS FINANCIAL MARKET WITH
SPECIAL EMPHASIS ON COMMODITY MARKET IN INDIA
By
Siddharth Agarwal
A0101912142
MBA Class of 2014
Under the supervision of
Ms. Swati Bhatnagar
Assistant Professor
Department of Marketing
In Partial Fulfillment of the Requirements for the Degree of
Masters of Business Administration
at
AMITY BUSINESS SCHOOL
AMITY UNIVERSITY UTTARPRADESH
SECTOR 125, NOIDA-201303,UTTARPRADESH, INDIA
1
DECLARATION
Date:
Siddharth
Agarwal
A0101912142
MBA class of 2014
CERTIFICATE
I Ms. Swati Bhatnagar hereby certify that Siddharth Agarwal student of Masters of Business
Administration at Amity Business School, Amity University Uttar Pradesh has completed the
Project Report on Study of operations of various financial markets with special emphasis on
commodity market in India.
ACKNOWLEDGEMENT
An undertaking of work life - this is never an outcome of a single person; rather it bears the
imprints of a number of people who directly or indirectly helped me in completing the present
study. I would be failing in my duties if I don't say a word of thanks to all those who made my
training period educative and pleasurable one. I am thankful to INDIAINFOLINE LIMITED,
DELHI for giving me an opportunity to do summer training in the company.
First of all, I am extremely grateful to Mr. Ashwani kumar (Associate vice president) for his
guidance, encouragement and tutelage during the course of the internship despite his extremely
busy schedule. My very special thanks to him for giving me the opportunity to do this project
and for his support throughout as a mentor.
I must also thank my faculty guide Ms. Swati Bhatnagar (Faculty, Amity Business School) for
her continuous support, mellow criticism and able directional guidance during the project.
I would also like to thank all the respondents for giving their precious time and relevant
information and experience, I required, without which the Project would have been incomplete.
Finally I would like to thank all lecturers, friends and my family for their kind support and to all
who have directly or indirectly helped me in preparing this project report. And at last I am
thankful to all divine light and my parents, who kept my motivation and zest for knowledge
always high through the tides of time.
TABLE OF CONTENTS
Chapter 1: Introduction to Company..1
1.1 Introduction to Derivatives ..4
1.1.2 Products, Participants and Functions..5
1.1.3 Economic function performed with the help of derivative market.6
1.1.4 Types of derivative market.7
1.1.5 Difference between commodity and financial derivative...9
1.1.6 Quality of underlying Assets.11
1.2 Introduction to Commodity Market11
1.2.1 History of evolution of commodity market....15
1.2.2 History of commodity market in India...16
1.2.3 Legal framework for regulatory commodity futures in India.18
1.2.4 How commodity market
works...22
1.2.5 Current scenario in Indian commodity market...23
Chapter 2: Literature Review.32
Chapter 3: Research methodology.36
Chapter 4: Analysis and Interpretations.39
Chapter 5: Conclusion and Recommendations..56
References..59
Annexure61
List of Tables
1.1 Commodity exchange in India and commodities traded21
1.2 Commodity futures trade in India...24
1.3 Volume and value of trade..26
1.4 Top commodities traded on MCX..27
1.5 Top commodities traded on NCDEX.28
1.6 Top commodities traded on NCME...29
1.7 Top commodities traded on ICEX.30
1.8 Top commodities traded on ACE...31
List of Graphs
4.1 Analysis of investors preference.40
4.2 Investor preference towards financial market.40
4.3 Investors attitude towards financial market41
4.4 Preference of investors in commodity market.42
4.5 Index preference of investors..42
4.6 Reason for resistance in commodity market43
4.7 Source of information to investors..43
4.8 Rating of investors towards various attributes ...44
List of Figures
1.1 Indian commodity future exchange..21
1.2 Working of commodity market22
ABSTRACT
As we know that Indian economy is an agriculture economy as around more than half of the
population depends upon agriculture sector. Agriculture sector contributes a vast amount to GDP
of the economy. So, India is one of the top producers of large number of commodities and also
has a long history of trading in commodities and related derivatives. Commodity is any product
that can be used for commerce or an article of commerce which is traded on an authorized
commodity exchange is known as commodity. The article should be movable of value,
something which is bought or sold and which is produced or used as the subject or barter or sale.
All goods and products of agricultural (including plantation), mineral and fossil origin are
allowed for commodity trading recognized under the FCRA. The national commodity exchanges,
recognized by the Central Government, permits commodities which include precious (gold and
silver) and non-ferrous metals, cereals and pulses, ginned and un-ginned cotton, oilseeds, oils
and oilcakes, raw jute and jute goods, sugar and gur, potatoes and onions, coffee and tea, rubber
and spices. Etc.
The Commodities Derivatives market has seen ups and downs, but seems to have finally arrived
now. The market has made enormous progress in terms of Technology, transparency and trading
activity. As majority of Indian investors are not aware of organized commodity market; their
perception about is of risky to very risky investment. Many of them have wrong impression
about commodity market in their minds. It makes them specious towards commodity market.
So the basic aim of this study is to understand the functioning of Commodity Market in India in
relation to various exchanges that are available for trading under this market and current scenario
of commodity market in India along with rules and regulations under this market. The study also
pertains to understand the rationale or behavior of investors towards commodity market which
basically aims to understand the perception of retail investors in comparison to other markets
through a means of structured questionnaire.
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11
12
13
CHAPTER 1: INTRODUCTION
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IIFL (India Infoline group), comprising the holding company, India Infoline Ltd (NSE:
INDIAINFO,BSE: 532636) and its subsidiaries, is one of one of Indias premier providers of
financial services.
IIFL offers advice and an execution platform for the entire range of financial services covering
products ranging from loans, wealth management, asset management, insurance, fixed deposits,
investment banking, equities and derivatives, commodities, Government of India bonds and
other small savings instruments.
It owns and manages the website, www.indiainfoline.com, which is one of Indias leading online
destinations for personal finance, economy, corporate updates and equity and commodity-related
updates.
The company services 2.1 million customers with a team of 14,000 employees in 3,820 business
locations present in eight countries.
The facilities provided by IIFL are:Credit and finance: The facility is offered by subsidiaries India Infoline Finance Ltd and India
Infoline Housing Finance Ltd. The diversified lending portfolio includes home loans, healthcare
finance for medical equipments, SME and trader loans, secured loans against gold jewellery,
commercial vehicle financing, property loans, and capital market finance secured against
securities. In FY13, this segment posted an 82.10% year-on-year growth in revenues
at Rs. 17.37bn. The high quality loan book of Rs. 93.75bn as on March 31, 2013 is backed by
strong capital adequacy of over 20% well above the stipulated 15%.
Private wealth management: In an increasingly unpredictable world, there is greater investor
need for a comprehensive wealth management solution as opposed to disparate services. Under
this segment, IIFL Private Wealth offers advisory services to high net worth individuals and
corporate clients. It manages over Rs. 400bn of assets under advice on a client base exceeding
7,000 families.
Financial products division: The Group distributes a range of financial products like insurance,
mutual funds, National Pension Scheme, bonds and debentures through its extensive distribution
network. The company is a leader among non-bank promoted entities in the distribution of life
insurance and mutual funds. For FY13, annual premium mobilisation stood at Rs. 3.2bn.
Asset management: The business was launched in 2011 with a unique proposition. The maiden
scheme was, and still is, the lowest cost Nifty ETF in India. A total of six schemes have been
15
launched, including four close-ended debt schemes and two open-ended equity schemes. Total
Assets Under Management stands at Rs. 3.27bn as on March 31, 2013.
Equity, commodities and currency: Though the contribution to revenues is less than 15%, IIFL
Group continues to remain a leading online and offline broking as well as advisory services
provider for cash and derivative segments directed at retail and institutional clients. Over a
decade, the company has created a brand marked by informed research, systemic uptime,
transaction speed, cutting-edge technology, extensive footprint, high service standards and
competitive brokerage. It pioneered the concept of internet broking in India and rationalised
brokerage rates from 1-1.5% in the late 90s to as low as 0.05%. The extension into commodities
and currency trading reconciles with its vision to emerge as a one-stop-shop financial
intermediary.
Awards and recognition: IIFL has been awarded the Best Broker, India by FinanceAsia and the
Most Improved Brokerage, India in the AsiaMoney polls. India Infoline was also adjudged as
Fastest Growing Equity Broking House - Large firms by Dun & Bradstreet. A forerunner in the
field of equity research, IIFLs research is acknowledged by none other than Forbes as Best of
the Web and a must read for investors in Asia.
Core strength: Research
A forerunner in the field of equity research, IIFLs research is acknowledged by none other than
Forbes as Best of the Web and a must read for investors in Asia. IIFL research is available
not just over the Internet but also on international wire services like Bloomberg, Thomson, Dow
Jones Factiva and Internet Securities. It is amongst the most read incisive pieces from among
Indian brokerages.
Some key milestones:
On a consolidated basis, the company has posted a record all-time high income and profit for
FY13. Income and profit stood at Rs. 26.7bn and Rs. 2.79bn, respectively. Some important
milestones for the year gone by include loan book at Rs. 93.75bn, total borrowing at Rs. 92.2bn,
capital adequacy ratio of 21.6%, net interest margin of 9.5%, net non-performing assets at 0.17%
and cost to income ratio of 58.16%.
The company supports employment of over 24,000 people directly and thousands more
indirectly. The company services its 2.1mn customers through its network of 3,820 locations
present in 900 cities, covering literally every nook and corner of the country.
IIFL is physically present in key global markets includes subsidiaries in Colombo, Dubai, New
York, Mauritius, London, Singapore and Hong Kong.
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It is a proud corporate citizen with cumulative contribution since inception to the exchequer of
over Rs. 5 bn.
The company has set an example for the peer group with its financial literacy campaign or
Financial Literacy Agenda For Mass Empowerment touching more than 30mn people.
IIFLs short-term debt is rated CRISIL A1+ and ICRA (A1+) by Crisil and ICRA, respectively.
For the long-term, it has been rated ICRA(AA-) and CRISIL AA-/Stable indicating a high degree
of safety for timely servicing of financial obligations.
1.1 Introduction To Derivatives
The origin of derivatives can be traced back to the need of farmers to protect themselves against
fluctuations in the price of their crop. From the time of sowing to the time of crop harvest,
farmers would face price uncertainty. Through the use of simple derivative products, it was
possible for the farmer to partially or fully transfer price risks by locking-in asset prices. These
were simple contracts developed to meet the needs of farmers and were basically a means of
reducing risk.
A farmer who sowed his crop in June faced uncertainty over the price he would receive for his
harvest in September. In years of scarcity, he would probably obtain attractive prices. However,
during times of oversupply, he would have to dispose off his harvest at a very low price.
Clearly this meant that the farmer and his family were exposed to a high risk of price uncertainty.
On the other hand, a merchant with an ongoing requirement of grains too would face a price risk
that of having to pay exorbitant prices during scarcity, although favorable prices could be
obtained during periods of oversupply. Under such circumstances, it clearly made sense for the
farmer and the merchant to come together and enter into a contract whereby the price of the
grain to be delivered in September could be decided earlier. What they would then negotiate
happened to be a futures-type contract, which would enable both parties to eliminate the price
risk.
In 1848, the Chicago Board of Trade (CBOT) was established to bring farmers and merchants
together. A group of traders got together and created the `to-arrive' contract that permitted
farmers to lock in to price upfront and deliver the grain later. These to-arrive contracts proved
useful as a device for hedging and speculation on price changes. These were eventually
standardized, and in 1925 the first futures clearing house came into existence.
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Today, derivative contracts exist on a variety of commodities such as corn, pepper, cotton, wheat,
silver, etc. Besides commodities, derivatives contracts also exist on a lot of financial underlying
like stocks, interest rate, exchange rate, etc.
Derivates can be defined as, "A derivative is a product whose value is derived from the value of
one or more underlying variables or assets in a contractual manner." The underlying asset can be
equity, forex, commodity or any other asset. As earlier stated, we saw that wheat farmers may
wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date.
Such a transaction is an example of a derivative. The price of this derivative is driven by the spot
price of wheat which is the 'underlying' in this case.
The Forward Contracts (Regulation) Act, 1952, regulates the forward/ futures contracts in
commodities all over India. As per this Act, the Forward Markets Commission (FMC) continues
to have jurisdiction over commodity forward/ futures contracts. However, when derivatives
trading in securities was introduced in 2001, the term 'security' in the Securities Contracts
(Regulation) Act, 1956 (SC(R)A), was amended to include derivative contracts in securities.
Consequently, regulation of derivatives came under the purview of Securities Exchange Board of
India (SEBI). We thus have separate regulatory authorities for securities and commodity
derivative markets.
Derivatives are securities under the SC(R)A and hence the trading of derivatives is governed by
the regulatory framework under the SC(R)A. The Securities Contracts (Regulation) Act, 1956
defines 'derivative' to include 1. A security derived from a debt instrument, share, loan whether secured or unsecured, risk
instrument or contract for differences or any other form of security.
2. A contract which derives its value from the prices, or index of prices, of underlying
securities.
1.1.2 Products, Participants And Functions
Derivative contracts are of different types. The most common ones are forwards, futures, options
and swaps. Participants who trade in the derivatives market can be classified under the following
three broad categories: hedgers, speculators, and arbitragers.
1. Hedgers: The farmer's example that we discussed about was a case of hedging. Hedgers
face risk associated with the price of an asset. They use the futures or options markets to
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energize others to create new businesses, new products and new employment
opportunities, the benefit of which are immense.
Derivatives markets help increase savings and investment in the long run. The transfer of
risk enables market participants to expand their volume of activity
goods only happens at the future date as specified in the contract. In a forward contract, the
process of trading, clearing and settlement does not happen instantaneously. The trading happens
today, but the clearing and settlement happens at the end of the specified period.
A forward contract is the most basic derivative contract. We call it a derivative because it derives
value from the price of the asset underlying the contract, in this case- gold. If on the1st of
February, gold trades for Rs. 17,200 per 10 grams in the spot market, the contract becomes more
valuable to Aditya because it now enables him to buy gold at Rs.17,100 per 10 grams. If
however, the price of gold drops down to Rs. 16,900 per 10 grams he is worse off because as per
the terms of the contract, he is bound to pay Rs. 17,100 per 10 grams for the same gold. The
contract has now lost value from Adyta's point of view. Note that the value of the forward
contract to the goldsmith varies exactly in an opposite manner to its value for Aditya.
Exchange Traded Versus OTC Derivatives
Derivatives have probably been around for as long as people have been trading with one another.
Forward contracting dates back at least to the 12th century and may well have been around
before then. These contracts were typically OTC kind of contracts. Over the counter (OTC)
derivatives are privately negotiated contracts. Merchants entered into contracts with one another
for future delivery of specified amount of commodities at specified price. A primary motivation
for prearranging a buyer or seller for a stock of commodities in early forward contracts was to
lessen the possibility that large swings would inhibit marketing the commodity after a harvest
Later many of these contracts were standardized in terms of quantity and delivery dates and
began to trade on an exchange.
The OTC derivatives markets have the following features compared to exchange-traded
derivatives:
1. The management of counter-party (credit) risk is decentralized and located within
individual institutions.
2. There are no formal centralized limits on individual positions, leverage, or margining.
3. There are no formal rules for risk and burden-sharing.
4. There are no formal rules or mechanisms for ensuring market stability and integrity, and
for safeguarding the collective interests of market participants.
5. The OTC contracts are generally not regulated by a regulatory authority and the
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The derivatives markets have witnessed rather sharp growth over the last few years, which have
accompanied the modernization of commercial and investment banking and globalization of
financial activities. The recent developments in information technology have contributed to a
great extent to these developments. While both exchange-traded and OTC derivative contracts
offer many benefits, the former have rigid structures compared to the latter.
The largest OTC derivative market is the inter-bank foreign exchange market. Commodity
derivatives, the world over are typically exchange-traded and not OTC in nature.
cost of movement of goods across locations. The process of taking physical delivery in
commodities is quite different from the process of taking physical delivery in financial assets.
Delivery notice period
Unlike in the case of equity futures, typically a seller of commodity futures has the option to give
notice of delivery. This option is given during a period identified as `delivery notice period'.
Assignment
Whenever delivery notices are given by the seller, the clearing house of the Exchange identifies
the buyer to whom this notice may be assigned. Exchanges follow different practices for the
assignment process.
Delivery
The procedure for buyer and seller regarding the physical settlement for different types of
contracts is clearly specified by the Exchange. The period available for the buyer to take physical
delivery is stipulated by the Exchange. Buyer or his authorized representative in the presence of
seller or his representative takes the physical stocks against the delivery order. Proof of physical
delivery having been effected is forwarded by the seller to the clearing house and the invoice
amount is credited to the seller's account.
The clearing house decides on the delivery order rate at which delivery will be settled. Delivery
rate depends on the spot rate of the underlying adjusted for discount/ premium for quality and
freight costs. The discount/ premium for quality and freight costs are published by the clearing
house before introduction of the contract. The most active spot market is normally taken as the
benchmark for deciding spot prices.
Warehousing
One of the main differences between financial and commodity derivative is the need for
warehousing. In case of most exchange-traded financial derivatives, all the positions are cash
settled. Cash settlement involves paying up the difference in prices between the time the contract
was entered into and the time the contract was closed. For instance, if a trader buys futures on a
23
stock at Rs.100 and on the day of expiration, the futures on that stock close at Rs.120, he does
not really have to buy the underlying stock. All he does is take the difference of Rs.20 in cash.
Similarly, the person who sold this futures contract at Rs.100 does not have to deliver the
underlying stock. All he has to do is pay up the loss of Rs.20 in cash.
In case of commodity derivatives however, there is a possibility of physical settlement. It means
that if the seller chooses to hand over the commodity instead of the difference in cash,
the buyer must take physical delivery of the underlying asset. This requires the Exchange to
make an arrangement with warehouses to handle the settlements. The efficacy of the
commodities settlements depends on the warehousing system available. Such warehouses have
to perform the following functions:
Earmark separate storage areas as specified by the Exchange for storing commodities;
Ensure proper grading of commodities before they are stored;
Store commodities according to their grade specifications and validity period; and
Ensure that necessary steps and precautions are taken to ensure that the quantity and
grade of commodity, as certified in the warehouse receipt, are maintained during the
storage period. This receipt can also be used as collateral for financing.
In India, NCDEX has accredited over 775 delivery centers which meet the requirements for the
physical holding of goods that are to be delivered on the platform. As future trading is delivery
based, it is necessary to create the logistics support for the same.
1.1.6 Quality of Underlying Assets
A derivatives contract is written on a given underlying. Variance in quality is not an issue in case
of financial derivatives as the physical attribute is missing. When the underlying asset is a
commodity, the quality of the underlying asset is of prime importance. There may be quite some
variation in the quality of what is available in the marketplace. When the asset is specified, it is
therefore important that the Exchange stipulate the grade or grades of the commodity that are
acceptable. Commodity derivatives demand good standards and quality assurance/ certification
procedures. A good grading system allows commodities to be traded by specification.
Trading in commodity derivatives also requires quality assurance and certifications from
specialized agencies. In India, for example, the Bureau of Indian Standards (BIS) under the
Department of Consumer Affairs specifies standards for processed agricultural commodities.
24
AGMARK, another certifying body under the Department of Agriculture and Cooperation,
specifies standards for basic agricultural commodities.
1.2 INTRODUCTION TO COMMODITY MARKET
What is Commodity?
Any product that can be used for commerce or an article of commerce which is traded on an
authorized commodity exchange is known as commodity. The article should be movable of
value, something which is bought or sold and which is produced or used as the subject or barter
or sale. In short commodity includes all kinds of goods. Indian Forward Contracts (Regulation)
Act (FCRA), 1952 defines goods as every kind of movable property other than actionable
claims, money and securities.
In current situation, all goods and products of agricultural (including plantation), mineral and
fossil origin are allowed for commodity trading recognized under the FCRA. The national
commodity exchanges, recognized by the Central Government, permits commodities which
include precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and unginned cotton, oilseeds, oils and oilcakes, raw jute and jute goods, sugar and gur, potatoes and
onions, coffee and tea, rubber and spices. Etc.
What is a commodity exchange?
A commodity exchange is an association or a company or any other body corporate organizing
futures trading in commodities for which license has been granted by regulating authority.
What is Commodity Future
A Commodity futures is an agreement between two parties to buy or sell a specified and
standardized quantity of a commodity at a certain time in future at a price agreed upon at the
time of entering into the contract on the commodity futures exchange. The need for a futures
market arises mainly due to the hedging function that it can perform. Commodity markets, like
any other financial instrument, involve risk associated with frequent price volatility. The loss due
to price volatility can be attributed to the following reasons:
Consumer Preferences: - In the short-term, their influence on price volatility is small since it is
a slow process permitting manufacturers, dealers and wholesalers to adjust their inventory in
advance.
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Changes in supply: - They are abrupt and unpredictable bringing about wild fluctuations in
prices. This can especially noticed in agricultural commodities where the weather plays a major
role in affecting the fortunes of people involved in this industry. The futures market has evolved
to neutralize such risks through a mechanism; namely hedging.
The objectives of Commodity futures:
Hedging with the objective of transferring risk related to the possession of physical assets
through any adverse moments in price. Liquidity and Price discovery to ensure base
minimum volume in trading of a commodity through market information and demand
supply factors that facilitates a regular and authentic price discovery mechanism.
Price stabilization along with balancing demand and supply position. Futures trading
leads to predictability in assessing the domestic prices, which maintains stability, thus
safeguarding against any short term adverse price movements. Liquidity in Contracts of
the commodities traded also ensures in maintaining the equilibrium between demand and
supply.
The primary objectives of any futures exchange are authentic price discovery and an efficient
price risk management. The beneficiaries include those who trade in the commodities being
offered in the exchange as well as those who have nothing to do with futures trading. It is
because of price discovery and risk management through the existence of futures exchanges that
a lot of businesses and services are able to function smoothly.
1. Price Discovery:-Based on inputs regarding specific market information, the demand
and supply equilibrium, weather forecasts, expert views and comments, inflation rates,
Government policies, market dynamics, hopes and fears, buyers and sellers conduct
trading at futures exchanges. This transforms in to continuous price discovery
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mechanism. The execution of trade between buyers and sellers leads to assessment of fair
value of a particular commodity that is immediately disseminated on the trading terminal.
2.
Price Risk Management: - Hedging is the most common method of price risk
management. It is strategy of offering price risk that is inherent in spot market by taking
an equal but opposite position in the futures market. Futures markets are used as a mode
by hedgers to protect their business from adverse price change. This could dent the
profitability of their business. Hedging benefits who are involved in trading of
commodities like farmers, processors, merchandisers, manufacturers, exporters,
importers etc.
3.
Import- Export competitiveness: - The exporters can hedge their price risk and
improve their competitiveness by making use of futures market. A majority of traders
which are involved in physical trade internationally intend to buy forwards. The
purchases made from the physical market might expose them to the risk of price risk
resulting to losses. The existence of futures market would allow the exporters to hedge
their proposed purchase by temporarily substituting for actual purchase till the time is
ripe to buy in physical market. In the absence of futures market it will be meticulous,
time consuming and costly physical transactions.
4. Predictable Pricing: - The demand for certain commodities is highly price elastic. The
manufacturers have to ensure that the prices should be stable in order to protect their
market share with the free entry of imports. Futures contracts will enable predictability in
domestic prices. The manufacturers can, as a result, smooth out the influence of changes
in their input prices very easily. With no futures market, the manufacturer can be caught
between severe short-term price movements of oils and necessity to maintain price
stability, which could only be possible through sufficient financial reserves that could
otherwise be utilized for making other profitable investments.
5. Benefits for farmers/Agriculturalists: - Price instability has a direct bearing on farmers
in the absence of futures market. There would be no need to have large reserves to cover
against unfavorable price fluctuations. This would reduce the risk premiums associated
with the marketing or processing margins enabling more returns on produce. Storing
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more and being more active in the markets. The price information accessible to the
farmers determines the extent to which traders/processors increase price to them. Since
one of the objectives of futures exchange is to make available these prices as far as
possible, it is very likely to benefit the farmers. Also, due to the time lag between
planning and production, the market-determined price information disseminated by
futures exchanges would be crucial for their production decisions.
6. Credit accessibility: - The absence of proper risk management tools would attract the
marketing and processing of commodities to high-risk exposure making it risky business
activity to fund. Even a small movement in prices can eat up a huge proportion of capital
owned by traders, at times making it virtually impossible to pay back the loan. There is a
high degree of reluctance among banks to fund commodity traders, especially those who
do not manage price risks. If in case they do, the interest rate is likely to be high and
terms and conditions very stringent. This posses a huge obstacle in the smooth
functioning and competition of commodities market. Hedging, which is possible through
futures markets, would cut down the discount rate in commodity lending.
7. Improved product quality: - The existence of warehouses for facilitating delivery with
grading facilities along with other related benefits provides a very strong reason to
upgrade and enhance the quality of the commodity to grade that is acceptable by the
exchange. It ensures uniform standardization of commodity trade, including the terms of
quality standard: the quality certificates that are issued by the exchange-certified
warehouses have the potential to become the norm for physical trade.
History of Evolution of commodity markets
Commodities future trading was evolved from need of assured continuous supply of seasonal
agricultural crops. The concept of organized trading in commodities evolved in Chicago, in
1848. But one can trace its roots in Japan. In Japan merchants used to store Rice in warehouses
for future use. To raise cash warehouse holders sold receipts against the stored rice. These were
known as rice tickets. Eventually, these rice tickets become accepted as a kind of commercial
currency. Latter on rules came in to being, to standardize the trading in rice tickets. In 19 th
century Chicago in United States had emerged as a major commercial hub. So that wheat
producers from Mid-west attracted here to sell their produce to dealers & distributors. Due to
28
lack of organized storage facilities, absence of uniform weighing & grading mechanisms
producers often confined to the mercy of dealers discretion. These situations lead to need of
establishing a common meeting place for farmers and dealers to transact in spot grain to deliver
wheat and receive cash in return.
Gradually sellers & buyers started making commitments to exchange the produce for cash in
future and thus contract for futures trading evolved. Whereby the producer would agree to sell
his produce to the buyer at a future delivery date at an agreed upon price. In this way producer
was aware of what price he would fetch for his produce and dealer would know about his cost
involved, in advance. This kind of agreement proved beneficial to both of them. As if dealer is
not interested in taking delivery of the produce, he could sell his contract to someone who needs
the same. Similarly producer who not intended to deliver his produce to dealer could pass on the
same responsibility to someone else. The price of such contract would dependent on the price
movements in the wheat market. Latter on by making some modifications these contracts
transformed in to an instrument to protect involved parties against adverse factors such as
unexpected price movements and unfavorable climatic factors. This promoted traders entry in
futures market, which had no intentions to buy or sell wheat but would purely speculate on price
movements in market to earn profit.
Trading of wheat in futures became very profitable which encouraged the entry of other
commodities in futures market. This created a platform for establishment of a body to regulate
and supervise these contracts. Thats why Chicago Board of Trade (CBOT) was established in
1848. In 1870 and 1880s the New York Coffee, Cotton and Produce Exchanges were born.
Agricultural commodities were mostly traded but as long as there are buyers and sellers, any
commodity can be traded. In 1872, a group of Manhattan dairy merchants got together to bring
chaotic condition in New York market to a system in terms of storage, pricing, and transfer of
agricultural products. In 1933, during the Great Depression, the Commodity Exchange, Inc. was
established in New York through the merger of four small exchanges the National Metal
Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the New
York Hide Exchange.
The largest commodity exchange in USA is Chicago Board of Trade, The Chicago Mercantile
Exchange, the New York Mercantile Exchange, the New York Commodity Exchange and New
York Coffee, sugar and cocoa Exchange. Worldwide there are major futures trading exchanges in
over twenty countries including Canada, England, India, France, Singapore, Japan, Australia and
New Zealand.
29
History of Commodity Market in India:The Commodity Futures market in India dates back to more than a century. The first organized
futures market was established in 1875, under the name of Bombay Cotton Trade Association
to trade in cotton derivative contracts. This was followed by institutions for futures trading in
oilseeds, food grains, etc. The futures market in India underwent rapid growth between the
period of First and Second World War. As a result, before the outbreak of the Second World War,
a large number of commodity exchanges trading futures contracts in several commodities like
cotton, groundnut, groundnut oil, raw jute, jute goods, castor seed, wheat, rice, sugar, precious
metals like gold and silver were flourishing throughout the country. In view of the delicate
supply situation of major commodities in the backdrop of war efforts mobilization, futures
trading came to be prohibited during the Second World War under the Defence of India Act.
After Independence, especially in the second half of the 1950s and first half of 1960s, the
commodity futures trading again picked up and there were thriving commodity markets.
However, in mid-1960s, commodity futures trading in most of the commodities was banned and
futures trading continued in two minor commodities, viz, pepper and turmeric.
The history of organized commodity derivatives in India goes back to the nineteenth century
when Cotton Trade Association started futures trading in 1875, about a decade after they started
in Chicago. Over the time datives market developed in several commodities in India. Following
Cotton, derivatives trading started in oilseed in Bombay (1900), raw jute and jute goods in
Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920).
However many feared that derivatives fuelled unnecessary speculation and were detrimental to
the healthy functioning of the market for the underlying commodities, resulting in to banning of
commodity options trading and cash settlement of commodities futures after independence in
1952. The parliament passed the Forward Contracts (Regulation) Act, 1952, which regulated
contracts in Commodities all over the India. The act prohibited options trading in Goods along
with cash settlement of forward trades, rendering a crushing blow to the commodity derivatives
market. Under the act only those associations/exchanges, which are granted reorganization from
the Government, are allowed to organize forward trading in regulated commodities. The act
envisages three tire regulations: (i) Exchange which organizes forward trading in commodities
can regulate trading on day-to-day basis; (ii) Forward Markets Commission provides regulatory
oversight under the powers delegated to it by the central Government. (iii) The Central
30
Government- Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public
Distribution- is the ultimate regulatory authority.
The commodities future market remained dismantled and remained dormant for about four
decades until the new millennium when the Government, in a complete change in a policy,
started actively encouraging commodity market. After Liberalization and Globalization in 1990,
the Government set up a committee (1993) to examine the role of futures trading. The
Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17
commodity groups. It also recommended strengthening Forward Markets Commission, and
certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing option
trading in goods and registration of brokers with Forward Markets Commission.
The
Government accepted most of these recommendations and futures trading was permitted in all
recommended commodities. It is timely decision since internationally the commodity cycle is on
upswing and the next decade being touched as the decade of Commodities.
Commodity exchange in India plays an important role where the prices of any commodity are
not fixed, in an organized way. Earlier only the buyer of produce and its seller in the market
judged upon the prices. Others never had a say.
Today, commodity exchanges are purely speculative in nature. Before discovering the price,
they reach to the producers, end-users, and even the retail investors, at a grassroots level. It
brings a price transparency and risk management in the vital market. A big difference between a
typical auction, where a single auctioneer announces the bids and the Exchange is that people are
not only competing to buy but also to sell. By Exchange rules and by law, no one can bid under a
higher bid, and no one can offer to sell higher than someone elses lower offer. That keeps the
market as efficient as possible, and keeps the traders on their toes to make sure no one gets the
purchase or sale before they do. Since 2002, the commodities future market in India has
experienced an unexpected boom in terms of modern exchanges, number of commodities
allowed for derivatives trading as well as the value of futures trading in commodities, which
crossed $ 1 trillion mark in 2006. Since 1952 till 2002 commodity datives market was virtually
non- existent, except some negligible activities on OTC basis.
In India there are 25 recognized future exchanges, of which there are three national level multicommodity exchanges. After a gap of almost three decades, Government of India has allowed
forward transactions in commodities through Online Commodity Exchanges, a modification of
traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and
delivery of commodities. The three exchanges are: National Commodity & Derivatives
31
Exchange Limited (NCDEX) Mumbai, Multi Commodity Exchange of India Limited (MCX)
Mumbai
and
National
Multi-Commodity
Exchange
of
India
Limited
(NMCEIL)
Ahmedabad.There are other regional commodity exchanges situated in different parts of India.
Legal framework for regulating commodity futures in India:The commodity futures traded in commodity exchanges are regulated by the Government under
the Forward Contracts Regulations Act, 1952 and the Rules framed there under. The regulator for
the commodities trading is the Forward Markets Commission, situated at Mumbai, which comes
under the Ministry of Consumer Affairs Food and Public Distribution
Forward Markets Commission (FMC):It is statutory institution set up in 1953 under Forward Contracts (Regulation) Act, 1952.
Commission consists of minimum two and maximum four members appointed by Central Govt.
Out of these members there is one nominated chairman. All the exchanges have been set up
under overall control of Forward Market Commission (FMC) of Government of India.
There are 21 Commodity Exchanges (15 Regional and 6 National Exchanges) regulating futures
trading in commodities under the purview of the Forward Markets Commission (FMC). The
country's commodity futures exchanges are divided majorly into two categories:
National exchanges
Regional exchanges
The Five exchanges operating at the national level (as on ) are:
i) National Commodity and Derivatives Exchange of India Ltd. (NCDEX)
ii) National Multi Commodity Exchange of India Ltd. (NMCE)
iii) Multi Commodity Exchange of India Ltd. (MCX)
iv)Indian Commodity Exchange Ltd. (ICEX) which started trading operations on November
27, 2009
v) ACE Derivatives and Commodity Exchange
The leading regional exchange is the National Board of Trade (NBOT) located at Indore. There
are more than 15 regional commodity exchanges in India.
32
Figure 1.1
No. Exchanges
1 Multi Commodity
Exchange of India Ltd.,
Mumbai*
Main Commodities
Gold, Silver, Copper, Crude Oil, Zinc, Lead, Nickel,
Natural gas,
Aluminium, Mentha Oil, Crude_Palm_Oil, Refined
Soya Oil, Cardamom, Guar Seeds, Kapas, Potato,
Chana\Gram, Melted Menthol Flakes, Almond, Wheat,
Barley, Long Steel, Maize, Soybean Seeds, Gasoline US,
Tin, Kapaskhali, Platinum, Heating Oil
Guar Seed, Soy Bean, Soy Oil, Chana,RM Seed, Jeera,
Turmeric, Guar Gum, Pepper, Cotton Cake, Long Steel,
Gur, Kapas, Wheat, Red Chilli, Crude Oil, Maize, Gold,
Copper, Castor Seeds, Potato, Barley, Kachhi Ghani
Mustard Oil, Silver, Indian 28 Mm Cotton, Platinum
3 National Multi Commodity Rape/Mustard Seed, Guar Seeds, Nickel, Jute, Refined
Exchange of India
Soya Oil, Zinc, Rubber, Chana\Gram, Isabgul, Lead, Gold,
Limited, Ahmedabad*
Aluminium, Copper, Turmeric, Copra, Silver, Raw Jute,
Guar Gum, Pepper, Coffee Robusta, Castor Seeds, Mentha
Oil
changes in the futures price is recorded. Squiring off is done by taking an opposite contract so
that the net outstanding is nil.
For commodity futures to work, the seller should be able to deposit the commodity at warehouse
nearest to him and collect the warehouse receipt. The buyer should be able to take physical
delivery at a location of his choice on presenting the warehouse receipt. But at present in India
very few warehouses provide delivery for specific commodities.
Figure 1.2 Following diagram gives a fair idea about working of the Commodity
market.
Today Commodity trading system is fully computerized. Traders need not visit a commodity
market to speculate. With online commodity trading they could sit in the confines of their home
or office and call the shots.
The commodity trading system consists of certain prescribed steps or stages as follows:
I. Trading: - At this stage the following is the system implemented-
Order receiving
Execution
Matching
Reporting
Surveillance
Price limits
36
Position limits
Matching
Registration
Clearing
Clearing limits
Notation
Margining
Price limits
Position limits
Clearing house.
Marking to market
Reporting
37
According to Forward Markets Commission (FMC), the value of commodities traded from April
to February 15, 2011-12 was recorded at Rs 159.324 lakh crore in comparison to the value of
commodities traded from April to February FY 2012-13 was recorded at Rs 157.828 lakh crore,
suggesting decline in trading activity in 2012-13.
Trends in volume contribution on the three National Exchanges:Pattern on Multi Commodity Exchange (MCX):MCX is currently largest commodity exchange in the country in terms of trade volumes,
further it has even become the third largest in bullion and second largest in silver future trading
in the world. Coming to trade pattern, though there are about 100 commodities traded on MCX,
only 3 or 4 commodities contribute for more than 80 percent of total trade volume. As per recent
data the largely traded commodities are Gold, Silver, Energy and base Metals. Incidentally the
futures trends of these commodities are mainly driven by international futures prices rather than
the changes in domestic demand-supply and hence, the price signals largely reflect international
scenario. Among Agricultural commodities major volume contributors include Gur, Urad,
Menthol Oil etc. Whose market sizes are considerably small making then vulnerable to
manipulations. MCX is Indias leading commodity futures exchange with a market share of 87.3
per cent in terms of the value of commodity futures contracts traded in FY 2012-13. The
Exchange was the third largest commodity futures exchange in the world, in terms of the number
of contracts traded in CY2012, based on the Futures Industry Associations annual volume
survey released in March 2013. Moreover, as per the survey, during CY 2012, MCX was the
world's largest exchange in silver and gold futures, second largest in copper and natural gas
futures, and the third largest in crude oil futures. MCX has forged strategic alliances with leading
international exchanges such as CME Group, London Metal Exchange (LME), Shanghai Futures
Exchange (SHFE) and Taiwan Futures Exchange (TAIFEX). The Exchange has also tied-up with
various trade bodies, corporate, educational institutions and R&D centers across the country.
These alliances enable the Exchange in improving trade practices, increasing awareness, and
facilitating overall improvement of commodity futures market.
Pattern on National Commodity & Derivatives Exchange (NCDEX):NCDEX is the second largest commodity exchange in the country after MCX. However the
major volume contributors on NCDEX are agricultural commodities. But, most of them have
common inherent problem of small market size, which is making them vulnerable to market
38
manipulations and over speculation. About 60 percent trade on NCDEX comes from guar seed,
channa and Urad (narrow commodities as specified by FMC).
Pattern on National Multi Commodity Exchange (NMCE):NMCE is third national level futures exchange that has been largely trading in Agricultural
Commodities. Trade on NMCE had considerable proportion of commodities with big market size
as jute rubber etc. But, in subsequent period, the pattern has changed and slowly moved towards
commodities with small market size or narrow commodities.
Analysis of volume contributions on three major national commodity exchanges reveled the
following pattern,
Major volume contributors: - Majority of trade has been concentrated in few commodities that
are
Non Agricultural Commodities (bullion, metals and energy)
Agricultural commodities with small market size (or narrow commodities) like guar, Urad,
Menthol etc.
As of March 2012, futures trading in urad, tur and rice remain suspended.
During the period under review (January 2013 to March 2013), the total value of trade in all
commodities traded at the recognized Exchanges was `40.84 lakh crore as against `41.99 lakh
crore during the previous quarter (October 2012 to December 2012) and `44.03 lakh crore during
the corresponding period of last year.
The five major commodity exchanges contributed 99.63 % to the total value of trade in the
Commodity futures market. These are MCX, Mumbai (88.31 %), NCDEX, Mumbai (7.15 %),
NMCE, Ahmedabad (1.52 %), ICEX, Mumbai (1.83 %), and ACE Derivatives and Commodity
Exchange Ltd., Mumbai (0.82%).
Table 1.3 Total volume and value of trade during the quarter (January 2013 to March 2013) in
39
Value (` in
Crore)
3606867.16
% share (In
value
terms)
88.31
678.79
292014.68
7.15
84.21
61967.85
1.52
136.08
75131.51
1.83
56.20
33428.45
0.82
3240.05
4069409.65
99.63
Others
32.24
14982.82
0.37
Grand total
3272.29
4084392.47
100.00
Name of Exchange
Multi Commodity Exchange of India
Ltd., Mumbai
National Commodity & Derivatives
Exchange Ltd., Mumbai
National Multi Commodity Exchange
of India Ltd., Ahmedabad
Indian Commodity Exchange Ltd.,
Mumbai
ACE Derivatives & Commodity
Exchange Ltd., Mumbai
Total of top 5 exchanges
Note: Natural Gas volumes are not included in the Total Volume
During the period under review Silver, Gold, Crude Oil, Copper, Natural Gas, Lead, Zinc &
Nickel contracts constituted a major share of the value of commodities traded at the MCX,
Mumbai. The following table indicates the % share of major commodities traded at MCX,
Mumbai, during the period under review.
Table 1.4 Top commodities traded on MCX during the quarter (January 2013 to March 2013)
Commodities
Total value
(In ` crores)
SILVER
GOLD
CRUDEOIL
COPPER
NATURAL GAS
LEAD
ZINC
NICKEL
Total of major commodities
Other commodities
Total
936279.660
906262.427
653661.839
293087.998
221621.380
212341.570
137550.888
101419.834
3462225.596
144641.563
3606867.158
25.96
25.13
18.12
8.13
6.14
5.89
3.81
2.81
95.99
4.01
100.00
41
During the period under review Soy Oil, Soya Bean, Castor Seed, Dhaniya, R/M Seed,
Chana, Cotton Seed Oil Cake, Kapas, Jeera & Turmeric constituted a major share of the
value of commodities traded at the NCDEX, Mumbai.The following table indicates the %
share of major commodities traded at NCDEX, Mumbai during the period under review.
Table 1.5 Top commodities traded on NCDEX during the quarter (January 2013 to March
2013)
Commodities
Total value
(In `crores)
SOYA_OIL
101121.123
SOYABEAN
39302.174
CASTOR_SEED
24150.850
DHANIYA
22826.798
R/M SEED
17693.340
CHANA
16396.567
COTTON_CAKE
15867.319
KAPAS
13025.696
JEERA
10493.146
TURMERIC
10022.351
Total of major commodities 270899.364
Other commodities
21115.320
Total
292014.684
During the period under review Raw Jute, coffee Rep Bulk, Nickel, copper and Lead
constituted a major share of the value of commodities traded at the NMCE, Ahmedabad.
42
The following table indicates the % share of major commodities traded at NMCE,
Ahmedabad during the period under review.
Table 1.6 Top commodities traded on NMCE during the quarter (January 2013 to March
2013)
% share to the
Commodities
RAW JUTE
5992.41
9.67
5633.35
9.09
NICKEL
4223.85
6.82
COPPER
4236.62
6.84
LEAD
4150.76
6.70
Total of Major
Commodities
24236.99
39.11
Others Commodities
37730.86
60.89
Total
61967.851
100.00
During the period under review Natural Gas, Crude Oil, Silver, Copper, Iron ore, Lead, &
Gold constituted a major share of the value of commodities traded at the ICEX, Mumbai.
43
The following table indicates the % share of major commodities traded at ICEX, Mumbai
during the period under review.
Table 1.7 Top commodities traded on ICEX during the quarter (January 2013 to March
2013)
Commodities
Total value
% share to the total value
(In ` crores)
NATURAL GAS
29145.559
38.79
CRUDEOIL
12037.273
16.02
SILVER
8992.213
11.97
COPPERCATHODE
8785.815
11.69
IRONORE62FINES
7554.096
10.05
LEAD
5977.320
7.96
GOLD
2625.347
3.49
Total of major commodities 75117.621
99.98
Other commodities
13.883
0.02
Total
75131.504
100.00
Note: Natural Gas volumes are not included in the Total Volume
During the period under review Soy Oil, RBD, Soya Meal & Cotton constituted a major
share of the value of commodities traded at the ACE, Mumbai. The following table
indicates the % share of major commodities traded at ACE, Mumbai during the period
under review.
44
Table 1.8 Top commodities traded on ACE during the quarter (January 2013 to March
2013)
Total value
Commodities
REFSOYOIL
RBD
SOYMEAL
COTTON118
Total of major
commodities
Other commodities
Total
(In `crores)
23916.861
2905.998
2499.456
2455.443
Value
71.55
8.69
7.48
7.35
31777.758
95.06
1650.690
33428.448
4.94
100.00
45
46
47
(UNCTAD,5 June 2011) ,The major findings in this article was laid on the functioning
of commodity markets and the flow of information that affect the trading decisions. The
paper also summarizes the recent developments and trends in fundaments on both the
demand and supply side. They have urged that due to increase in the number of investors
in commodity market who do not base their trading purely on the basis of demand and
supply has lead to misleading price signals in the market . Another finding in this paper
was that investors want to diversify their portfolio which is playing an important role for
them to invest in commodity market rather than understanding the fundamentals for
investment.
(Ke Tang and Wei Xiong, March 2011),The primary objective of this paper was to find
out the effect growing investment in commodity futures markets has had on commodity
price co-movements. In order to find out the relationship between the two the authors
conducted a regression test between the oil and selected commodities from various
sectors and the major finding was that with the increase in investment by investors
observed since the early 2000s futures prices of non-energy commodities have become
increasingly correlated with oil.
(John Baffes and Tassos Haniotis ,July 2010),The main objective of this paper was to
analyze three potentially key factors behind recent commodity price increases: excess
liquidity and speculation, increasing food demand by emerging economies and the use of
some food commodities for biofuel production. The major findings in this paper was
speculation played a key role during the 2008 price rise whereas the use of some food
commodities for biofuel production played a small role and the increase in food demand
by emerging economies played no noticeable role.
(Lutz Kilian and Dan Murphy, 16 March 2010), The main objective of this study was
to develop a structural vector autoregressive (VAR) model of the global oil market. The
major findings of this study was that the increase in oil prices observed from 2003 to
2008 was caused by fluctuations in the flow demand for oil driven by the global business
cycle. The model also suggests that speculative trading played an important role during
oil price shocks observed in 1979, 1986 and 1990.
48
(Christopher Gilbert, March 2010),Main purpose of this study was to quantify the
effect of bubble
index-based
findings of this study was that both bubble behavior and index investments have had a
substantial impact on commodity futures prices.
(Jeffrey Currie, Allison Nathan, David Greely and Damien Courvalin, 30 March
2010) ,The major findings of this study was that commodity price movements can be
explained by increasing marginal costs in the long term and fluctuations in inventories in
the short term. The authors also find speculative investors contributed to increased price
levels and price volatility in recent years noting as speculators buy, prices generally tend
to rise, and vice versa. Also the author points out that there is close relationship between
price volatility, inventories and storage capacity, as inventories help in closing the gap
between physical supply and demand.
(Scott Irwin and Dwight Sanders, 2010),The paper aims to test whether the major
growth in index funds has increased price volatility in both agricultural and energy
markets and, in particular, whether they helped cause a commodity price bubble in 200608.The findings of this study was that there were no strong evidence that index funds
caused a price bubble in commodity futures markets. The authors also find increasing
index fund positions are consistently associated with declining price volatility and this
paper gives a reasonable explanation for this negative correlation arguing speculation
helps to provide sufficient liquidity for hedging needs.
(International Monetary Fund, October 2008),The basic output of this study was that
strong demand from emerging economies, low capacity, low inventories resulting in slow
supply responses and the interaction between these factors have been the primary causes
of the surge in commodity prices observed in the first half of 2008. In addition, demand
for biofuel, supply disruptions and trade restrictions have caused food prices to surge
even higher. The authors also note that this price momentum may have been reinforced
by increased cross-commodity price linkages.
49
(Dwight Sanders, Scott Irwin and Robert Merrin, 1 January 2010), Under this study
the author brings out two important findings in agriculture futures market since 1995,
firstly a rapid increase in open interest since late 2004 and a stabilization of index funds
percentage of open interest since 2006.
(Gary Gorton and K. Geert Rouwenhorst ,March/April 2006),This paper concludes
that commodity futures returns have provided effective diversification for stock and
bond portfolios. Commodity futures have offered the same return and risk premium as
equities over the study period and are negatively correlated with equity and bond returns
due to different behavior over the business cycle and positively correlated with inflation,
unexpected inflation and changes in expected inflation.
50
1. Objectives of research:
To study the behavior of the individuals, their perspective, investment preference
for commodity market trading in India as compared to other financial markets in
India.
To study the operation and functioning of commodity market.
51
2. Research Design: Exploratory design has been selected as data has been collected from
the secondary sources inorder to understand the functioning of commodity market and
data has been collected from primary source inorder to satisfy the research objectives.
3. Data Collection Method: Most of the data has collected from secondary sources
whereas for conduct of research the primary data has been collected through a structured
questionnaire wherein a total of 130 respondents took part out of which only 100 have
been taken into consideration as the questionnaire pertains to a specific class of
respondents, so inorder to reduce the error this has been done. A total of 63 males and 37
females have been include in the research.
4. Sampling: The study mainly deals with the financial behavior of Individual Investors
towards Commodity market in India. The required data was collected through a pretested
questionnaire administered on a combination of convenience and judgment sample of
100 individual investors. Judgment sample selection is due to the time. Respondents were
screened and inclusion was purely on the basis of their knowledge about Financial
Markets, Commodity market in particular. This was necessary, because the questionnaire
presumed awareness of some basic terminology about Commodity market. The purpose
of the survey was to understand the behavioral aspects of individual investors, mainly
their fund selection behavior, various factors influencing this behavior and also the
conceptual awareness level among individual investors. Sample of the questionnaire is
given in Annex. A.
5. Instruments used: The primary data was collected through a structured questionnaire by
one to one interactions with investors and contact was also made through emails.
6. Analysis and Interpretations: The analysis of the data collected has been performed
appropriately and inferences have been drawn. The techniques that are used for analysis
of data are Descriptive technique, Crosstabs and Annova which have been performed by
the use of SPSS software.
7. Limitations of the study:
52
Sample size is limited to 100 educated individual investors. The sample size may not
adequately represent the national market.
Simple Random and judgment sampling techniques is due to time constraints.
This study has not been conducted over an extended period of time having both ups and
downs of stock market conditions which a significant influence on investor s buying
pattern and preferences.
The research is only exploratory, no conclusion may finally be drawn from it, but only
direction may be sought.
This is an independent study and the observations may not comply with those which have
been made by an experienced professional.
53
54
66
Tax benefits
Retirement protection
22
10
Future welfare
75
63
17
High income
0
25
10 20 30 40 50 60 70 80
FREQUENCY
Most of the investors want to invest money for the purpose of future welfare followed by high growth, so
company should suggest those instruments which have a positive return for their investment which will
help in fulfilling both the objectives.
2) Current investors preference of Individual Investors towards the Following Financial Markets, In the
Indian Capital Market
Graph 4.2
55
100
90
80
70
60
50
40
30
20
10
0
90
84
79
15
Frequency
From the above analysis we can infer that majority of the people invest in Equity market, while the
investment in Commodity market and Mutual funds are almost similar, so therefore investors are inclined
more towards the share market.
3) Current Attitude of Individual Investors towards the Following Financial Markets, In the Indian Capital
Market
Graph 4.3
56
Chart Title
Equity
Commodity
Currency
13
79
24
Real estate
Mutual fund
1
61
18
0
8
3
61
21
78
66
1
12
9
23
1
1
According to the analysis, we can see that most of the investors are favorable towards Mutual fund under
current market scenario followed by Commodity market and somewhat favorable towards Equity market.
So, it can be said that investors are looking for safe investment options along with safe return which can
be used as a motivation factor for investors to lure them in investing in commodity market. According to
the recent reports commodity market are the first to revive for current situation which add as an added
incentive for investors to invest in this market as returns are going to be favorable.
57
Frequency
Bullions
2%
Agro products
24%
Energy
16%
Metals
58%
From the above analysis we can clearly identify that Bullions i.e. Gold and Silver are the most favored
commodities to be traded in followed by Energy products such as Crude oil, Petroleum.
58
Frequency
1%
MCX
29%
NCDEX
NCFM
70%
Mostly investors prefer to deal on NCDEX platform even though MCX platform being the largest
platform for Commodity trading in India.
Frequency
Lack of knowledge
23%
38%
Difficulty in
understanding
Increase speculation
Very risky
39%
59
According to this analysis we can infer that people who already trade in Commodity market have a
perception that perspective investors are not attracted towards Commodity market primarily because of
difficulty in understanding as well as lack of knowledge of Commodity market, so the investing
companies can resort to various methods to inform these perspective investors and convert them to real
investors.
Frequency
Axis Title
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
From the above analysis we can infer that most of the investors are gathering data from newspapers and
from the brokers/agents.
60
70
60
50
40
Very low
30
Low
20
Neutral
High
10
very high
In the above chart we can clearly see that investors perceives that tier id high Liquidity, Flexibility and
Good returns in the commodity market whereas most of the investors feel that there is lack of Safety in
commodity market. Under the category of diversification it is almost equal so investors think that
commodity market plays a role to a certain extent in diversification but not too a great extent. Lastly,
investors are not very favorable towards capital appreciation due to investment in commodity market.
9) Crosstabs between Risk taking capacity and Investment horizon of an investor.
What is your preference of investment horizon- Short term * What is your risk taking capacity- High Crosstabulation
Table 4.1
What is your risk taking capacity- High
yes
no
Total
yes
21
23
no
73
77
94
100
Total
61
What is your prefernce of investment horizon- Short term * What is your risk taking capacity- Low Crosstabulation
Table 4.2
What is your risk taking capacity- Low
yes
no
Total
yes
12
11
23
no
34
43
77
46
54
100
Total
What is your preference of investment horizon- Short term * What is your risk taking capacity- Medium Cross
tabulation
Table 4.3
What is your risk taking capacity- Medium
yes
no
Total
yes
14
23
no
38
39
77
47
53
100
Total
From the above analysis we can find out that that there are very few investors who are willing to invest
for short time period so this can be used as great inference that people are willing to put their invest for
long or medium duration which is what is required in commodity market.
What is your preference of investment horizon- Long term * What is your risk taking capacity- High Cross tabulation
Table 4.4
What is your risk taking capacity- High
yes
no
Total
yes
42
44
no
52
56
94
100
Total
What is your preference of investment horizon- Long term * What is your risk taking capacity- Medium Cross
tabulation
Table 4.5
What is your risk taking capacity- Medium
yes
no
Total
yes
24
20
44
no
23
33
56
47
53
100
Total
62
What is your preference of investment horizon- Long term * What is your risk taking capacity- Low Cross tabulation
Table 4.6
What is your risk taking capacity- Low
yes
no
Total
yes
18
26
44
no
28
28
56
46
54
100
Total
The conclusion that can be drawn from the above three crosstabs is that investors are not in favour of
investing their money in commodity market for a long period of time even though some favorable results
have been seen in medium category of risk taking capacity of investors in relation to long investment
horizon.
What is your preference of investment horizon- Medium term * What is your risk taking capacity- High Cross
tabulation
Table 4.7
What is your risk taking capacity- High
yes
no
Total
yes
28
30
no
66
70
94
100
Total
What is your preference of investment horizon- Medium term * What is your risk taking capacity- Medium Cross
tabulation
Table 4.8
What is your risk taking capacity- Medium
yes
no
Total
yes
14
16
30
no
33
37
70
47
53
100
Total
63
What is your preference of investment horizon- Medium term * What is your risk taking capacity- Low Cross
tabulation
Table 4.9
What is your risk taking capacity- Low
yes
no
Total
yes
14
16
30
no
32
38
70
46
54
100
Total
From the above analysis we can infer that there are very few investors who are willing to invest in
commodity market. So, we can infer from all the above crosstabs that investors want to invest in
commodity market for long duration as compared to the other two horizons and investors have an appetite
for medium class of risk.
10) Cross tabulation between Annual income and Investment portion of income
Annual income * Investment portion of your income invested Cross tabulation
Table 4.10
Investment portion of your income invested
below 10%
Annual income
Total
below 100000
10-15 %
15-20%
Total
above 20%
16
16
100000-200000
200000-300000
35
41
above 300000
18
14
37
75
19
100
In the above analysis we can see that a majority of investors lie between the income group of 200000300000 and likewise investors are investing only a small portion of their income that is below 10% and
the third thing we can infer is that around 35 out of 100 lie in this common region.
11) Crosstabs between In which market the investors invest in relation to How they perceive that market.
64
In which financial market do you invest- Equity market * What is your current market attitude towards the following
financial markets- Equity Cross tabulation
Table 4.11
What is your current market attitude towards the following financial marketsEquity
highly
favourable
Favourable
Total
somewhat
not very
not at all
favourable
favourable
favourable
yes
23
61
90
No
10
23
66
100
market
Total
We can see that investors who are investing in Equity market are currently somewhat favourable towards
this market under current situation which provides an opportunity to shift investors or persuade them into
investing in commodity market.
In which financial market do you invest- Commodity market * What is your current market attitude towards the
following financial markets- Commodity Crosstabulation
Table 4.12
What is your current market attitude towards the following financial marketsCommodity
highly
favourable
favourable
Total
somewhat
not very
not at all
favourable
favourable
favourable
yes
60
17
84
do you invest-
no
16
61
21
12
100
Commodity market
Total
We can see that investors who are investing in Commodity market are currently favourable towards this
market under current situation which provides an opportunity to investors to earn good returns.
65
In which financial market do you invest- Currency market * What is your current market attitude towards the following
financial markets- Currency Cross tabulation
Table 4.13
What is your current market attitude towards the following financial
markets- Currency
favourable
Total
somewhat
not very
not at all
favourable
favourable
favourable
yes
15
no
13
69
85
18
78
100
Total
We can see that investors who are investing in Currency market are currently Not very favourable
towards this market under current situation which provides an opportunity to shift investors or persuade
them into investing in commodity market and this might be because of fall in rupee and economic
slowdown.
In which financial market do you invest- Real estate * What is your current market attitude towards the following
financial markets- Real estate Cross tabulation
Table 4.14
What is your current market attitude towards the following financial
markets- Real estate
favourable
Total
somewhat
not very
not at all
favourable
favourable
favourable
yes
no
22
61
97
24
61
100
Total
As we can see from the above table that there are only a handful of investors who are willing to invest in
Real estate market because of which no meaningful conclusions can be drawn.
66
In which financial market do you invest- Mutual funds * What is your current market attitude towards the following
financial markets- Mutual fund Cross tabulation
Table 4.15
What is your current market attitude towards the following financial marketsMutual fund
highly
favourable
favourable
Total
somewhat
not very
not at all
favourable
favourable
favourable
yes
70
79
no
10
21
79
13
100
funds
Total
From the above table we can infer that a large section of investors invest in Mutual fund market and their
current attitude towards this market is Favourable, this is because a high rate of return is generated under
this market or a fixed return in guaranteed which is not in the case of any other market.
12) Cross tabulation between Occupation and Market investment
In which financial market do you invest- Equity market * Occupation Cross tabulation
Table 4.16
Occupation
business
profession
self-employed
others
Total
yes
30
36
21
90
no
10
31
40
23
100
Total
In which financial market do you invest- Commodity market * Occupation Cross tabulation
Table 4.17
Occupation
business
profession
self-employed
others
Total
yes
27
33
21
84
no
16
31
40
23
100
Total
67
In which financial market do you invest- Mutual funds * Occupation Cross tabulation
Table 4.18
Occupation
business
profession
self-employed
others
Total
yes
24
32
19
79
no
21
31
40
23
100
Total
In the above analysis we can conclude that a large portion of investors are either professional or
businessman who are investing in different market and moreover there is high ratio of professionals
investing in various markets because of knowledge they posses and awareness about these markets.
13) Cross tabulation between Age groups and Investment objective
30-35
35-40
40above
Total
yes
25
High income
no
19
27
15
14
75
28
33
22
17
100
Total
30-35
35-40
40above
Total
yes
17
Stable income
no
24
30
17
12
83
28
33
22
17
100
Total
68
What is your investment objective- Reasonable income and safety * Age Crosstabulation
Table 4.21
Age
25-30
30-35
35-40
40above
Total
yes
17
26
11
63
no
11
11
37
28
33
22
17
100
Total
30-35
35-40
40above
Total
yes
18
23
19
15
75
Future welfare
no
10
10
25
28
33
22
17
100
Total
30-35
35-40
40above
Total
yes
10
Retirement protection
No
28
32
21
90
28
33
22
17
100
Total
30-35
35-40
40above
Total
yes
14
22
Tax benefit
no
26
32
17
78
28
33
22
17
100
Total
69
30-35
35-40
40above
Total
yes
18
28
15
66
High growth
no
10
12
34
28
33
22
17
100
Total
From the above tables we can infer that investors lying in the age group 30-35 are driven by high growth
and reasonable income and safety as an objective, on the other hand we can see, as the age group
increases investors are driven by the objective of future welfare and retirement protection.
14) Annova between Investment portion and Occupation
FORMATION OF HYPOTHESIS
H0:There is no significant difference between Investment portion and occupation of investors.
H1:There exists significance difference between Investment portion and occupation of investors.
Level of significance = 5%
ANOVA
Table 4.26
Sum of Squares
Between Groups
Df
Mean Square
4.737
1.579
Within Groups
33.023
96
.344
Total
37.760
99
F
4.590
Sig.
.005
As the F value or the test value is 4.590 which is significantly higher than 0.05 so we can not reject the
null hypothesis in favor of alternate hypothesis which means there is no significant difference between
investment portion and occupation of investors.
15) Annova between Investment objective of investors and Investment in commodity market.
FORMATION OF HYPOTHESIS
H0:There is no significant difference between Investment objective of investors and Investment in
commodity market.
H1:There exists significance difference between Investment objective of investors and Investment
in commodity market
Level of significance = 5%
70
ANOVA
Table 4.27
Sum of Squares
What is your investment
Between Groups
df
Mean Square
.044
.044
Within Groups
18.706
98
.191
Total
18.750
99
.170
.170
.142
Between Groups
Within Groups
13.940
98
Total
14.110
99
.562
.562
.232
Between Groups
objective- Reasonable
Within Groups
22.748
98
Total
23.310
99
Between Groups
.399
.399
Within Groups
18.351
98
.187
Total
18.750
99
.064
.064
.091
Between Groups
objective- Retirement
Within Groups
8.936
98
protection
Total
9.000
99
Between Groups
.309
.309
Within Groups
16.851
98
.172
Total
17.160
99
1.553
1.553
.213
Between Groups
objective-High growth
Within Groups
20.887
98
Total
22.440
99
71
Sig.
.232
.631
1.197
.277
2.420
.123
2.130
.148
.700
.405
1.797
.183
7.289
.008
ANOVA
Table 4.28
Sum of Squares
How do you come to know
Between Groups
df
Mean Square
.376
.376
Within Groups
23.414
98
.239
Total
23.790
99
Between Groups
.000
.000
Within Groups
.990
98
.010
market-
Total
.990
99
Between Groups
.765
.765
Within Groups
10.545
98
.108
market-
Total
11.310
99
.040
.040
.163
Sig.
1.573
.213
.010
.921
7.105
.009
.248
.620
1.715
.193
7.105
.009
.052
.820
Newspapers(general)
Newspapers(Business)
How do you come to know
Between Groups
Within Groups
15.960
98
market- Financial
Total
16.000
99
.401
.401
.234
magazines
How do you come to know
Between Groups
Within Groups
22.909
98
market- Television
Total
23.310
99
Between Groups
.765
.765
Within Groups
10.545
98
.108
market- Brokers/agents
Total
11.310
99
Between Groups
.003
.003
Within Groups
4.747
98
.048
market- Internet
Total
4.750
99
72
73
F
What is your
Equal variances
investment
assumed
objective- High
Equal variances
income
not assumed
What is your
Equal variances
investment
assumed
objective-
Equal variances
Stable income
not assumed
What is your
Equal variances
investment
assumed
objective-
Equal variances
Reasonable
not assumed
22.081
Sig.
.000
df
-
tailed)
Mean
Std. Error
Difference Difference
Difference
Lower
Upper
98
.043
-.182
.089
-.358
-.006
- 92.790
.029
-.182
.082
-.345
-.019
98
.482
-.055
.078
-.211
.100
-.731 83.746
.467
-.055
.076
-.206
.095
98
.004
.287
.097
.095
.479
3.153 89.662
.002
.287
.091
.106
.468
98
.287
.097
.090
-.082
.275
1.111 83.998
.270
.097
.087
-.076
.269
98
.245
-.073
.062
-.197
.051
- 95.663
.201
-.073
.057
-.185
.040
98
.010
-.221
.084
-.387
-.054
- 97.947
.004
-.221
.074
-.367
-.074
98
.495
.068
.099
-.128
.264
.6947478.427
.490
.068
.098
-.127
.262
2.055
2.221
2.112
37.812
.149
-.706
.000 2.966
income and
safety
What is your
Equal variances
investment
assumed
objective-
Equal variances
Future welfare
not assumed
What is your
Equal variances
investment
assumed
objective-
Equal variances
Retirement
not assumed
5.154
6.045
.025 1.072
.016
1.170
1.288
protection
What is your
Equal variances
investment
assumed
objective- Tax
Equal variances
benefit
not assumed
What is your
Equal variances
investment
assumed
objective-High
Equal variances
42.069
.000
2.633
2.982
2.051
.155
.686
75
This decade is termed as "Decade for Commodities". Since the economic slowdown all over the world,
the first scenes of recovery have been witnessed in commodity market. It was in 2010 that when the
prices of commodity markets were on a rise after recession which triggered a revival of many economies
such as USA, UK , India , China etc. Now the trend for commodity market is shifting to developing
countries like India due to high agricultural dependence and production. Moreover, in coming years
China will take over USA in commodity trading all over the world and India will jump to 3rd place this
will be because of high and growing population which will lead to increase in demand for agriculture
products and if we see the trend the overall yield per hectare is also increasing for the last decade.
India is one of the top producers of large number of commodities and also has a long history of trading in
commodities and related derivatives. The Commodities Derivatives market has seen ups and downs, but
seems to have finally arrived now. The market has made enormous progress in terms of Technology,
transparency and trading activity. As majority of Indian investors are not aware of organized commodity
market; their perception about it is of risky to very risky investment. Many of them have wrong
impression about commodity market in their minds. It makes them specious towards commodity market.
So, there is a large or vast amount of untapped market in India in both urban as well as rural sectors and
regulatory bodies have to play a major role in tapping these markets and luring investors to invest in
commodity market.
It is also believed that Indians have a high risk appetite. So, There is no doubt that in near future
commodity market will become hot spot for Indian farmers rather than spot market. And producers,
76
traders as well as consumers will be benefited from it. But for this to happen one has to take initiative to
standardize and popularize the Commodity Market.
So, one can conclude on the basis of the analysis that have been carried out that investors in current
scenario i.e. with the burden of fall in rupee, increase inflation and high volatility have changed their
objectives to Reasonable income along with safety for the purpose of future welfare as future looks
uncertain. Now a day's investors are willing to bear very minimum risk and that too for short span of
period and most of the investors are inclined to invest their money in mutual funds and commodity
market. The attitude of investors towards mutual fund investment is much more favourable than any other
market as there is offer of around 12-14% guaranteed return which if brought about in commodity market
can lead to tapping of huge untapped market.
Investors are willing to invest only in bullions(gold, silver) as their prices tend to rise over a time horizon
and due to lack of knowledge other areas of commodity market as not favored upon as compared to
international market where large amount of money is invested in agriculture based products. Inorder to
increase investment in commodity market the regulators have to take initiative to educate and inform
mass people about the working of commodity market and ensure strict rules and regulations for investors
safety which is a major concern these days.
At last the major findings of this study are that investors are reluctant to invest in commodity market due
to lack of knowledge ad difficulty in understanding the functioning of commodity market and the major
area of concern for investors is the safety driven by the objective of reasonable income for future welfare.
Recommendations:i) The Commodity market operational environment is becoming more competitive. Hence, the
impact of emerging competition on investor behavior/behavioral changes needs to be studied
further.
ii) Developments in technology influence the behavior of investors. Hence, the impact of
technology on financial behavior is another potential area for close study.
iii) Since the industry is still struggling to win the investors confidence, in-depth analysis into
investors expectations from Commodity market, its performance, management, service and
other related areas could be done.
iv) This study reveals that Commodity market investors feel that currently the two major benefits,
which Commodity market claim to offer, namely, Diversification and Safety are not
satisfactorily delivered. In spite of this, Commodity market industry is growing and we
attribute this to investor behavior and other macroeconomic factors. Further research can be
77
done to understand the reasons for growing popularity on one side and the struggle to win
investors confidence on the other side.
v) As we have seen from this study that Commodity market is on a rise in terms of value, so a
study can be conducted further to understand the untapped market.
vi) This study was conducted during less volatile period of market, a further research can be
conducted on commodity market taking into consideration a long period where volatility can
also be taken into consideration and more meaningful conclusions can be drawn.
REFERENCES
Websites:
articles.economictimes.indiatimes.com/keyword/commodity_market (Economic times, 2013)
blog.euromonitor.com/2012/04/monthly-review-of-commodity-markets-april-2012-update.html
businesstoday.intoday.in/story/top-commodities
businesstoday.intodayin/story/indias-commodity-market-to-register-gains/1/15682.html
commodities.about.com/old/managingourportfolio/a/commodities-Review-For-2012.htm
en.wikipedia.org/wiki/commodity_market
moneyweek.com/eight_reasons_commodities_beat_study_every_time
www.bseindia.com/education/content/module_ncfm.htm
78
www.cmegroup.com
www.commodityonline.com/Futures-trading/market-report/India-commodity.futures.trade.valueat-Rs.157.828-lakhs-cr-inAprilFeb.2012-13:Fmc-29536.html
www.fmc.gov.in/shocs_file.aspx?linked=FMC%20Bulletin%20April%202013_32893130.pdf
www.forbes.com
www.futureindustry.org
www.globalresearch.co/india-commodity-transaction
www.icexindia.com
www.imf.org/external/np/res/commod/Commodity_Market_review1012.pdf
www.indiainfoline.com/Markets/News/MarketNews/Commodity
www.mcxindia.com
www.moneyschool.indianmoney.com/money-gyan-modules
www.ncdex.com
www.nmce.com
www.rjas.info/wp-content/uploads/2013/04/Commodity-Futures-Market-in-India-Impose-GrowthRoles-and-obstacles.pdf
www.tradingpick.com/begineers_guide.htm
Articles:
Commodity prices and Price volatility: old answers to new questions
Facts and fantasies about commodity futures
Index Investment and Financialization of commodities
Placing the 2006/08 commodity price boom into perspective
Price formation in Financialised commodity market: the role of information
Speculative influences on commodity futures prices 2006-08
The adequacy of speculation in agricultural futures market: Too much of a good times?
The impact of Index and swap funds on commodity futures markets
The role of inventories and speculative trading in the global market for crude oil
World economic outlook: Financial stress, Downturns and Recoveries
ANNEXURE
Annexure 1: Copy of questionnaire
79
(The IIFL (India Infoline) group, comprising the holding company, India Infoline Ltd and its subsidiaries,
is one of Indias premier providers of financial services. IIFL offers advice and execution platform for
the entire range of financial services covering products ranging from Equities and derivatives,
Commodities, Wealth management, Asset management, Insurance, Fixed deposits, Loans, Investment
Banking, Gold bonds and other small savings instruments.)
PERSONAL INFORMATION
1. Name
2. Gender
Mark only one oval.
Male
Female
3. Age
Mark only one oval.
25-30
30-35
35-40
40 above
4. Occupation
Mark only one oval.
Business
Profession
Self-employed
Others
80
5. Annual income
Mark only one oval.
Below 100000 100000-200000 200000300000 Above 300000
9. What is your current market attitude towards the following financial markets?
Mark only one oval per row.
Highly
favourable
Favourable
Equity
Commodity
Currency
Real estate
Mutual fund
Somewhat
favorable
Not very
favourable
Not at all
favourable
Above 3 years
17. What is the frequency of your trading?
Mark only one oval.
Daily
Weekly
Monthly
Every season
Occasionally
Rarely