IRJMSH Vol 6 Issue 5 [Year 2015] ISSN 2277 – 9809 (0nline) 2348–9359 (Print)

Growth of Commodity Derivatives Market in India: An Overview*

* Dr. Sajal Das

Assistant Professor, Dept. of Commerce, Burdwan University,

Burdwan, West Bengal, India.

(sajal.das@icai.org)

Mr. Abhijit Mitra

Research Scholar & Faculty, Bhairab Ganguly College,

Kolkata, West Bengal, India

(mitraabhi2007@gmail.com)

Abstract

Commodities are consumable products traded all over the world in different kinds of markets. It
plays a significant role in economic development of any country. Commodity derivatives
markets are such types of markets where primary products are traded on regulated commodities
exchanges on standardized contracts. India has a long history of trading in commodity
derivatives but emerged very strongly in recent decades. The Forward Market Commission
(FMC) is an important regulatory body of commodity futures market in India which oversees the
functioning of the market. Currently FMC has permitted 113 commodity futures contracts in
Indian market. In terms of total number of contracts traded, Multi Commodity Exchange of India
(MCX) is the world’s largest commodity futures exchange in gold and silver, second largest in
natural gas and third in crude oil. With price volatility and uncertainty prevailing in the spot
market, derivatives market provides an opportunity for risk mitigation through hedging. So
considering these points, the present study has been undertaken to provide an overview of the
growth of commodity derivatives market in India. The study analyses the challenges and issues
prevailing in the Indian market, its benefits and present trends and related future prospect.

Key Words: Forward Market Commission, Commodity Futures, MCX

I. Introduction
Commodities are consumable products with some specific utility that can be traded in
different types of markets. These are the raw materials which are used to create products for
consumption in our daily life across the globe, starting from food products in India to build new
homes in UK or to run a car in USA. Usually commodities are classified into two heads: hard

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commodities and soft commodities. Hard commodities are typically natural resources that must
be mined or extracted like gold, rubber, oil, etc., whereas soft commodities are agricultural
products or livestock like corn, wheat, coffee, sugar, soybeans, pork, etc. “Commodities play a
significant role in the economic development of all countries be a developed, developing or least
developed countries (LDCs)”1. The prime livelihood of most LDCs nations are still agro based
and India is no different too. “About 60 percent of Indian population is still dependent on
agriculture for livelihood even though the major contribution to GDP comes from service sector
now.”2
Commodity derivative markets are such markets where raw or primary products are
traded on regulated commodities exchanges in standardized contracts. “This market consists of
trading of forward or futures contracts; forward contracts are contractual agreements to buy or
sell any commodity between two entities; futures contracts are market agreements to buy or sell
very specific commodities between two entities over a recognized commodities exchange.”3 In
India, Forward Market Commission (FMC) controls the commodity exchanges and FMC is
regulated by ministry of finance. Presently, only exchange-traded commodity futures are traded.

2. Benefits of Commodity Futures Market

The main benefit of commodity futures market is to provide hedging against price risk.
Hedging allows transfer of price risk to other agents who are willing to bear such risk. Hedging
is the practice in which the hedgers buy future contracts for protection against rising commodity
prices and sell futures for protection against falling prices or to get a guaranteed price in the
future. Hedgers use the futures market to mitigate their price risk while speculators seek to profit
from the volatile price movements in the market. In this way, they provide much needed liquidity
to the market which is key to the growth of any trading market.
Another crucial function of futures market is price discovery. Price is essential for the
organisation to take their prediction & marketing decisions. Price discovery is the process by
which a buyer and seller comes to a transaction price for a given commodity. It also implies how
information is produced and transmitted across markets and whether this transmitted price is
used as a reference price for the trading purpose. Proper price discovery can help farmers and
traders in avoiding price declines in the post harvest period and help consumers in coping with
price volatility also. If any new information is reflected first in futures prices then it can be said
that futures markets are performing the price discovery function efficiently.
Futures markets also provide assistance for credit needs to small producers. The collateral
value of inventory is enhanced if it is hedged which enables firms to borrow on better terms.

3. Present Trends of Commodity Derivatives Market in India

The regulation of commodity futures markets is carried out through a three-tired
regulatory structure- the central government, the Forward Markets Commission and the
commodity exchanges. The FMC has permitted trading of 113 commodity futures contracts in
the Indian markets. These are food grains (e.g., wheat and gram), edible oilseeds complexes
(e.g., groundnut and cottonseed), spices (e.g., turmeric and pepper), fibers (e.g., cotton and jute),

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metals (e.g., gold and silver), energy (natural gas and crude oil) and other products such as guar
seed. However, gold, silver, guar seed, pepper and gram are also traded items in the Indian
derivatives markets.
“Though, there are currently 19 commodity derivatives exchanges in India, the bulk of
trading (99.88%) is concentrated in the following regional level commodity exchanges:”4
1. Multi Commodity Exchange of India(MCX), Mumbai
2. National Commodity Derivatives Exchange of India (NCDEX), Mumbai
3. National Multi Commodity Exchange (NMCE), Ahmedabad
4. Indian Commodity Exchange (ICEX), New Delhi
5. ACE Derivatives & Commodity Exchange Limited, Mumbai
6. Universal Commodity Exchange Limited, Navi Mumbai.
“In terms of total number of contracts traded, MCX has become the world’s largest
commodity futures exchange in gold and silver, second largest in natural gas, and third in crude
oil.”5 The top four commodities are gold, silver copper and crude oil. “These form 85% of
MCX’s total trading business.”6 NCDEX, on the other hand, deals with large number of
agricultural and metal commodities. NMCE’s portfolio includes major agricultural commodities
and metals.
Table-1: Turnover on Commodity Futures Market (Rs. in Crore)
Exchange 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
Multi 20,25,663 27,30,415 42,84,653 59,56,656 78,95,404 100,00,000
Commodity (58) (75) (85) (84) (83) (84)
Exchange
(MCX)
National 12,43,327 7,74,965 6,28,074 8,05,720 9,73,217 9,41,250
Commodity (36) (21) (12) (11) (10) (8)
and
Derivatives
Exchange
(NCDEX)
National 1,11,462 (3) 25,056 37,272 1,95,907 1,80,738 1,82,746 (1)
Multi (1) (1) (3) (2)
Commodity
Exchange
(NMCE)
Others 1,04,033 1,24,051 83,885 1,32,173 4,45,366 8,24,946
(3) (3) (2) (2) (5) (7)
Total 34,84,485 36,54,487 50,33,884 70,90,456 94,94,725 119,48,942
(100) (100) (100) (100) (100) (100)

Source: Ministry of Consumer Affairs (Figures in parentheses indicates percentage)

Table-1 shows the annual turnover of the India’s top most commodity exchanges for the past six
years from 2006-07 to 2011-12. It is evident that total turnover on commodity future market is
increasing gradually from Rs.34,84,485 in 2006-07 to 119,48,942 in 2011-12. In the year 2006-
07, the value of trading in MCX is Rs.20,25,663 crores that shows 58% in total turnover of the

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year 2006-07. MCX turnover has attained the higher turnover of Rs.100,00,000 crores in the year
2011-12. From 2008-09 to 2011-12, MCX has more than 80% share in the total turnover.
The value of trading in NCDEX is Rs. 12,43,327 crores that is 36% of the total turnover
in the year 2006-07. From 2006-07 to 2011-12 the percentage of turnover of NCDEX has been
constantly decreasing. In the year 2007-08, 2008-09, 2009-10, 2010-11 and 2011-12 the turnover
of NCDEX are 21%, 12%, 11%, 10% and 8% of the total turnover respectively.
NMCE traded 1,11,462 crores (i.e., 3% of total turnover) in the year 2006-07. The value
of trading in NMCE has around 3% to 1% of the total turnover among the commodity market
exchanges from year 2006-07 to 2011-12.

Before these national commodity futures exchanges, 24 regional commodity exchanges

were operating in India. Currently almost all the regional exchanges are close down. “Almost 17
out of 24 regional exchanges have not traded for the past 5 years and 13 of them have not carried
out trading in the last 10 years. This is not a positive development as only a handful of national
exchanges are monopolizing the futures market.”7
4. Policy Issues and Challenges
There are various types of challenges and issues are prevailing in the commodity market
in India. The issues may differ from each other. For inclusive growth, importance should be
given on the farmers, processors, entrepreneurs, especially the marginal and small ones. In this
perspective, a few challenges, problems and their respective remedial measures in relation to
commodity market are discussed below;-
 Our national exchanges are well equipped with online digital technology for commodity
trading. “Computer networking of traders and the exchange is done through satellite
based network (VSAT) or dedicated leased line from the service provider.”8 With this
technology large number of transaction can be processed quickly. However, in future, if
any advancement of derivatives market happens through the introduction of index futures
and options trading and entry of banks, mutual funds and FIIs (Foreign Institutional
Investors), existing infrastructure will require to be upgraded to handle the increased
pressure. It is noteworthy in this circumstance that ICT (Information and Communication
Technology) is able to link those potential stakeholders, directly involved in commodity
trading but are left out due to technological backwardness in remote areas in Indian
markets.
 The major challenge for the development of derivatives market is the fragmented
physical markets, situated in remote areas not having any access to the modern
derivatives market. This decreases the liquidity in the futures market. This problems can
be handled by initiating the awareness drive by FMC through conducting trainings,
awareness programmes etc. The physical market is required to be modernized by
amending the APMC (Agricultural Produce Marketing Committee) Acts.
 “There are three agencies in the public sector, which are basically engaged in building
large scale storage/ warehousing capacity namely Food Corporation of India (FCI),

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Central Warehousing Corporation (CWC) and 17 State Warehousing Corporation

(SWCs) but these is not sufficient.”9 Warehouses need to be qualitatively and
quantitatively sound and conveniently located at strategic locations.
 With proper regulation and monitoring mechanism and detailed reporting system, options
in commodity trading can be introduced so that the participants can reap full benefits of
hedging through derivatives. “In futures trading they are able to hedge the risk arising
due to unfavorable price movements but they cannot take position to gain from the
favorable price movements.”10 In options there has such choice.
 At present FMC operates under the Ministry of Finance. “In view of the stupendous task
of handling derivatives trading in commodities whose volume has surpassed that of
Equities, the powers of FMC should be increased. It should be given an autonomous
status like SEBI and take decisions that in the best interest of stakeholders of commodity
markets.”11

5. Conclusion
Indian economy is a developing economy where commodity markets are growing rapidly
but derivatives have been introduced recently. The roles of top three commodity exchanges are
important in this context. In terms of value of contract traded in various commodity exchanges,
MCX plays a major role. One of the basic reasons for introduction of commodity future trading
was to enable farmers to hedge their price risk. But this objective does not reach its success
properly till now. Future trading in agricultural goods has neither led in price discovery nor
benefits the farmers in securing higher prices for their produce. Moreover, there are some
loopholes in the Indian commodity market. The disappearance of regional exchanges is not a
positive development. This is despite the fact that regional exchanges better reflect region
specific prices. As a result, a handful of national exchanges are monopolizing the future market.
However, with the increasing demand of various products, the strain on commodities is
going to increase in near future. The prices of commodity will not be predicted properly. In this
juncture commodity derivatives will act as an excellent risk management tool to bring stability to
the economic activities of the country.

Foot Notes
1
Mahajan, N., Singh, K.( 2015). “A Beginner’s Guide to Indian Commodity Futures Markets”,
Madhyam, New Delhi, p-3
2
Ibid
3
Periasamy, P., Satish, R.(2014). “A study on Commodity Derivative Market of Selected Non-
Agriccultural Products (Gold, Crude Oil, Copper) in the Chennai Market- An
Analysis”, IOSR Journal of Economics and Finance (IOSR-JEF), Volume 2, Issue 6,
Feb., p -38
4
Mahajan, N., Singh, K.( 2015). “A Beginner’s Guide to Indian Commodity Futures Markets”,
Madhyam, New Delhi, p-41
5
Ibid

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6
Ibid
7
Ibid., p- 42-43
8
Malhotra, M.(2012). “Commodity Derivatives Market in India: The Road Traveled and
Challenges Ahead”, Asian Journal of Business and Economics, Volume 2, No.2.1
Quarter I, p-17
9
Ahmad, S., Jamshed, M.(2014). “Nurturing an Agriculture Friendly Commodity Derivatives
Marketing in India”, MIJBR, Vol. 1, Issue 1, January-June
(http://mba.mits.ac.in/MIJBR/6.Nurturing%20an%20Agriculture%20Friendly%20Comm
odity%20Derivatives%20Marketing%20in%20India.pdf)
10
Malhotra, M.( 2012). “Commodity Derivatives Market in India: The Road Traveled and
Challenges Ahead”, Asian Journal of Business and Economics, Volume 2, No.2.1
Quarter I p-17-18
11
Ibid., p-18

References
Chatnani N. Niti, (2010). Commodity Markets: Operations, Instruments and Application, Tata
McGraw Hill, New Delhi
Kulkarni, B. (2011). Commodity Markets & Derivatives, Excel Books, New Delhi.
Prabina, R. (2014). Commodity Derivatives and Risk Management, PHI Learning Private Ltd.,
Delhi.

Websites Consulted
www.mcxindia.com
www.ncdex.com
www.commoditiescontrol.com

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