A RISING PROFILE OF INDIAN COMMODITIES MARKET

ABSTRACT

Like the equities market, the commodity futures market in India is also in a
phenomenal growth pace in the last two years. The market grew by an astounding 440
per cent during the just concluded fiscal to an aggregate value of Rs. 21.34 lakh crore
($500 billion approx), up from Rs. 5.72 lakh crore in 2004-2005 (FMC reports). There
are some 90 commodities traded in 3 national exchanges and 21 regional or commodity
specific exchanges the top five being Gold, Silver, guar Seed, Chana and Urad. The
primary function of a commodity futures market is price discovery and price risk
management. While this function is essential for farmers, other stakeholders such as
processors, corporate, traders, exporters and consumers also turn to these markets.
Research reports indicate, a significant part of trade is speculation driven, with
participation by hedgers largely limited or almost absent.

Even while feeling good about the soaring volumes, there is need to pause and
examine the increasing interests of investors to invest in commodities futures markets,
the major initiatives of FMC to strengthen the regional bourses and the impact of stake
holders to the present growth. It is stakeholders to the present growth. It is only through
a comprehensive review, that commodities futures market can set itself on a healthy and
transparent path. Clearly this is a challenge for the regulator to address and make
commodity futures a perfect trading for all participants.
A RISING PROFILE OF INDIAN COMMODITIES MARKET

INTRODUCTION

The upward stride of the commodity futures Market, a journey that commenced
sometime in 2002 after almost four decades of banning has in recent months gained
unprecedented momentum. The next Bull run is predicted in this new asset class which
seems to presently competing with securities, forex, bond and real-estate markets in
attracting investible funds. Surely, there are both demand side and supply side factors
that have contributed to the bull run in a number of commodities including Base metals,
Precious metals and agricultural goods. Prices of crude, copper, bullion, to name a few
have reached multi-year highs. With the integration of the domestic market with the
global set-up the risk perception is high, but opportunities have opened up for risk
management and profiting. According to the Forward Markets Commission, futures
trading in Commodities has quadrupled in the just concluded fiscal to an aggregate value
of Rs. 21,34,000 crore ($500 Billion) up from Rs. 5,72,000 crore in 2004-05.
Significantly this rapid growth was possible without any institutional participation like
FIIS, Banks, Mutual funds and corporates who are the key volume drivers in equities
markets.

Present some 90 commodities are being traded in 3 national multi-commodity

Exchanges and 21 Regional Exchanges (which are usually limited to trading in one or
two commodities). The 3 national exchanges account for 80-90% of Total trading
volumes and interestingly 5-6 commodities contribute to about 70-80% of Total
exchange's volume. Clearly, a significant part of trade is speculation driven, with
participation by hedgers largely limited or almost absent. This paper examines the
various facets of market outlook such as the increasing interest of investors, the initiatives
of Forward Markets Commission (FMC) to strengthen the regional exchanges and the
role of various stakeholders.

With a positive policy and regulatory framework in place and also, sound
economic fundamentals the commodity futures markets in India can grow further in the
coming years.

Increasing Interest of Investors

Institutional investor interest is rising in developed economics. Estimate of the

total amount of commodity tracking funds worldwide is estimated at over $50 Billion.
Mutual funds and Pension funds have humungous sums of money are seeking to invest in
commodities (source: Business line Feb 27,06). Central Banks in Asia are looking for
asset diversification and gold is a hot favorite. Since global agricultural commodity
supplies are driven by twin engines of technology and farm support major growth
markets of Asia- that is China and India attract the investor’s interest. FMC the regulator
for commodities market is contemplating on introducing FIIS and mutual fund houses in
futures trading. It has already completed its report on FII participation and is currently
working with RBI to set up a proper regulatory framework. Amendments to the forwards
contract (Regulation) Act are on the anvil and there after FMC would have functional and
financial autonomy to regulate the market more effectively.

Initiative of regulator to strengthen bourses

Forward Markets commissions (FMC) as the regulator of commodity futures

Market is taking a keen interest in the orderly growth of commodity markets. At present
there are 21 regional exchanges and most of them are single commodity exchanges, while
there are 3 national exchanges which account for 94% of trading in terms of value during
the fiscal 2005-06. The commodity futures markets recorded a total value of trade of Rs.
21-32 lakh crore. Even though trading volumes by the regional exchanges are small they
have a major role in supporting the local trade and therefore strengthening them is more
important rather than phasing them out. Hence FMC has come out with solutions such as
technology upgradation, demutualization starting online trading and trading in additional
commodities if they follow certain pre-conditions. The chairman of FMC Mr. S.
Sundaresan mentions few exchanges such as National Board of trade at Indore, Regional
exchanges at Happer, Mazzafarnagar, Rajkot and Ahmedabad are running fairly well.

Role of Stakeholders

A commodity futures market is a meeting place of buyers and sellers of an ever-

existing list of commodities. With the full supply-chain cycle of agricultural sector right
from farmers, traders, processors, corporates, exporters feeling the need to hedge price
risks and make informed price decisions, their representation is important. In this content,
the role of national commodity exchanges in conducting awareness programs, training
session’s though innovative methods such as ‘E-choupal’ is noteworthy. While a few
companies in the food processing sector such as sugar mills, edible oils processors etc are
trading commodity futures, the same cannot be said about companies in other sectors.
Corporate too (although never prohibited from trading], have kept themselves away from
the market. However exchanges have taken initiatives in warehousing and strengthening
of spot market are delivering real benefits to stakeholders. Today the exchanges either
own/hire 120-150 warehouses and are considerably increasing their number to enable the
small farmers in every of the country to participate.

CONCLUSION

While the commodity future markets are safe and the investors are well protected,
the study of the market is a pre-requisite before the investment.

There are differences between the security and commodity markets, in the latter
the delivery mechanism is an essential feature and quality concerns and warehousing
aspects are to be given prime importance. Volatility in the market affects important
segments of the economy with contradictory interests like producer and consumer. Some
thing should be done to attract the genuine hedgers. It is time the regulator made a
comprehensive review of the commodities futures market and set it on a healthy,
transparent growth path that advance the interests of important stakeholders.