DETERMINANTS OF MACROECONOMIC INDICATORS

ON COMMODITY FUTURES PRICE

SRIMATHI.G 1, BIJAY KUMAR SAHOO2 AND Dr. PRABHAKAR NANDRU 3

ABSTRACT

One of the most innovative financial instruments which helps the market participants in
eliminating the risk are derivatives. Earlier commodity derivatives are considered to be old
concept but recently it got updated with new face into the battle. In India, at initial stage
derivatives are launched on index and on securities and then followed by commodities
periodically for the enhancement of the markets and the price realization. For the future
economic growth, commodity availability is needed for long term which is economical and
convenient. Currently in India, 21 commodity futures exchanges are active. Forward Market
Commission acts as the regulatory body of commodity market. The intention of this study is to
understand the movement of commodity futures price by using the four macroeconomic
indicators such as Whole Sale Price Index, Gross Domestic Product, MIBOR and Exchange
Rate. In this study the commodity futures are categorized under Bullion, Base Metals, and
Energy and Agriculture Commodity futures. From each category one commodity futures price is
taken as a dependent variable and the four macroeconomic indicators are considered as
independent variable.

Keywords: Commodity Futures, Bullion, Base metals, Energy, Agriculture Commodities, GDP,
Whole Sale Price index, Exchange Rate, MIBOR

● Guest Faculty, Department of Corporate Secretaryship, Avvaiyar Government college for

Women, Karaikal. Mobile 9003300950, Email:srimathiganesh54@gmail.com
● M.COM, Business Finance, Department of Commerce, Pondicherry University, Karaikal
Campus, Karaikal. Mobile 9439078944, Email: bijaykumar1408@gmail.com
● Guest Faculty, Department of Commerce, Pondicherry University, Karaikal Campus,
Karaikal. Mobile 8309746713, Email:prabhakarphd897@gmail.com.
 1. INTRODUCTION
The prices of commodity have endorsed a rapid increase in latter period on all parts
of the globe. Together with the financial derivative market, commodity derivative market has
also grown high in contemporary years (Sheeba Kapil and Kanwal Nayan Kapil, 2010). Nations
trade has been broadening by the globalization policy besides its frontier prominent to imports
and exports of goods or services on all parts of the countries. This hiked the demand for
commodities and enlarged their price determinants on macroeconomic variables (Kirithiga et al.,
2019).

On the every individual lives the commodity is allied by stirring the economy. It is problematic
to diagnose the cause for the commodities price hike, but there are a part of common factors
affecting it. The economies potential is holded by derivatives market as they stabilize the
floatation of prices, balances the demand and supply and also stays as a price measurer to the
traders and farmers apart from stipulating competition ( Lokare ,2007).

The commodity prices are determined by the yardstick afforded by the commodity markets.
Abundance of economies is periodically impart to macroeconomic alteration in concerning to the
commodity price movements. During the financial crisis, the world economy has been striked by
the rise in commodity prices( Machiko Nissanke , 2011).

Due to decrease in the value of different derivatives including commodity derivative, the utility
of futures market has been provoked by the global crash (Nilanjan Ghosh, 2009). The investors
need to consider the macroeconomic announcement on the floatation of each market before
getting diversified into other markets. Pricing of securities has been made based on the key role
played by the macroeconomic news.(Reddy et al., 2019). The supremacy of macroeconomic
indicators however precisely affects the commodity prices and to escort the risk in the
commodities prices, the commodity market has to assimilate the macroeconomic information
also.

Review of literature shows a several inconsistencies in the results for the researchers in the past,
which points at different directions therefore, in an endeavor to fill up this gap, the present study
seeks to label the determinants of macroeconomic indicators on commodity futures price.
2. Literature review

In order to scrutinize different macroeconomic indicators and check out the effect of
macroeconomic indicators on commodity derivatives, the current study has reviewed the
literature with respect to global and Indian contexts.

2.1 Global context

A study by Farhan Ahmed et al. (2017), analyzed that co-integration done among the Oil Prices,
KSE-100 Index, Consumer Price Index and the Exchange Rate (US-Dollar) within the
circumstances of Pakistani economy. The findings of the study revealed that CPI, Oil Prices,
PKR/USD and KSE-100 Index has no such relationship in the long run and there does not exists
co-integrated equation.

Omid Faseli (2019), investigated the impact of 38 major scheduled macroeconomic news on the
crude oil intraday volatility from 2012 to 2018. The primary objective was to provide news
ranking that indicated upcoming high volatility episodes at some specific point in time. simple
and multiple robust ordinary least squares (OLS) regression was used to performed Data
modeling. 21 significant news announcements were identified in both, the simple as well as
multiple regression model, however, simple OLS-regression appears to be more sensitive. This
study signifies the importance of the macroeconomic indicators in pricing the crude oil.

Kristina Strpic et al. (2017), This study examined the influence of macroeconomic reports
relating to operating rigs and production quota to closing intraday oil price, as well as the effect
of other important daily market indices. The result indicated that only the Producer Price Index
(PPI) has a statistical significance of affecting intraday closing oil price.

A very recent study by Imlak SHAIKH (2020), examined the equity, commodity, interest rates,
and currency markets, with respect to the US economic policy uncertainty index. The author
concentrated on the relationship among policy uncertainty and volatility index, which was
expressed in terms of generalized autoregressive conditional heteroscedasticity (GARCH) and
period of empirical work over a period from 2000 to 2018, and found that based on the high
degree of policy uncertainty, there was a high volatility in the equity market. They concluded
that in the commodity market indicate that crude oil and gold prices were more volatile the
presidential election and financial crisis.

Emre IŞIKLI and Tuğba AKIN (2018), investigated the impact response analysis between
inflation and energy prices index derived from spot energy prices in the international markets,
USD currency and sovereign CDS of Turkey by using VAR model and revaled that a shock to
energy prices has a negative impact on CDS and USD currency. At the same time, USD currency
rate has a significant effect on the CDS and inflation.

Yifan Shen et al. (2018), examined dynamic causal effects between global uncertainty and
various crucial global macroeconomic indicators, and linked global uncertainty measure to the
price formation of crude oil and international uncertainty spillover effects. The results suggested
that the uncertainty shocks have strong impacts on economic activities, even in the international
context. Further they suggested that the uncertainty shocks as a source of business cycle
fluctuations regional as well as a global phenomenon.

Lu Yang et al. (2017), studied the systemic risk in US agricultural commodity markets on real
economic activities because of macroeconomic shocks. This study used a combination of four
econometric tools: mixed data sampling, Conditional Value-at-Risk, wavelet transform, and
quantile regression. They found the macroeconomic shock especially the inflation shocks were
highly predictable using systematic risk and also macroeconomic shocks are negatively affected
by systematic risk. This specifies the significance of understanding the systematic risk in the
market.

2.2 INDIAN CONTEXT

Gnanendra and Nishta Shri (2018), determined the impact of various important macroeconomic
indicators like stock market indices, interest rates, exchange rate and crude oil prices on the gold
price. In this study they used regression and correlation to evaluate the association between all
the variables and found that gold has a significant association with SENSEX and interest rates, a
moderate association with exchange rate and less association with crude oil comparing to other
variables.
A study of Lakshmi et al. (2015), examined the relationship between the returns of both spot and
futures contract of crude oil and gold. With a primary emphasis was to study whether volumes of
future trading react faster to news and help to predict the returns in spot trading. The results of
the study concluded that the volume of gold futures trading reacted faster to information which
made the gold spot returns more predictable than crude oil in the Indian commodity markets.

Raghavendra et al. (2016), explored for the market which reacts first in India through assessing
the association between spot prices and future prices of 5 agricultural commodities. In this study
Regression relating to Lead-Lag relationship among Spot markets and Future markets was used.
The study concluded the existence of long-run equilibrium relationships among futures prices
and spot prices for five agricultural commodities and there were a one-way causal linkage
between future market prices and spot market prices for two agricultural commodities, viz., Soya
bean and Chana. the presence of bidirectional relationship among commodity futures and spot
market for three selected agricultural commodities was also concluded in the results.

A study by Arpana and Nandhini (2017), investigated the causal relationship among the gold and
crude oil prices in India. The findings of the study proved that return on price and volume of
gold and crude oil forms a leptokurtic distribution and was more clustered around the mean and
relatively has a lesser standard deviation. The study also found that return on prices of crude oil
has a negative relation with the returns on volume, whereas the return on price of Gold has a
positive relation with the returns on volume.

A study by Mantu Kumar Mahalik et al. (2014), investigated the price discovery and volatility
spillovers effect with respect to Indian commodities spot and futures markets. The conclusion
was drawn for four futures and spot indices from Multi-Commodity Exchange, Mumbai. vector
error correction model and bivariate exponential Garch model was used in to check the . And it
was found that The agriculture future price index, energy future price index and aggregate
commodity index effectively serve the price discovery function in the spot market, which implied
the existence of flow of information from future commodity market to spot commodity markets.
In addition to it no cointegration relationship was found between metal future price index and
metal spot price index, the bivariate EGARCH model indicated the existence of strong volatility
spillovers from future to the spot market in the case of LENERGY and LCOMDEX index.
3. RESEARCH METHODOLOGY

The present study is based on secondary data.

● Mainly the data has been collected through secondary data source.
● Secondary data’s are taken from Multi Commodity Exchange, and the report published
by the World Bank and RBI.

3.2 OBJECTIVES OF THE STUDY

1. To examine the waves of macroeconomic indicators due to change in the gold futures
price.
2. To investigate the effect of macroeconomic indicators on the aluminium futures price
movements.
3. To evaluate the effect of macroeconomic indicators on crude oil futures price movements.
4. To observe the effect of macroeconomic indicators on cardamom futures price movements.
5. To examine the combined effect of macroeconomic indicators on the commodity market

4. SCOPE OF THE STUDY

Industries utilize commodities as primal matter and households for consumption whose demand
influence its prices. India is one of the vital importer and exporter of commodities in the world,
which gets affected by the exchange rate. The commodity prices get affected since the economic
condition plays a critical role. The additional investment avenues such as money market
instruments or stock market impact the commodity market trading which indirectly affects
commodity prices. When industries demand raw materials increases, India has to either find a
new source, which increases government cost affecting the economic condition or import them
affecting the exchange rate and Export and Import (EXIM) policy. Hence, the macroeconomic
indicators impact on commodity futures price is significant to judge the mode to be followed by
the commodity futures price. Thus, this study is carried out with the objective of analyzing the
determinants of macroeconomic indicators on the commodity futures price.
5. DATA ANALYSIS AND INTERPRETATION

ANALYSIS OF FUTURES PRICE

5.1 Multiple Regression

Multiple Regression is an expansion of simple linear regression. In order to forecast the value of
variable based on the value of more than two variables multiple regression is adopted. The
variable which we predict is called the dependent variable (or sometimes, the end result, target or
criterion variable).

Model: 1
GOLDFUTURESPRICE = α + β1GDP + β2 MIBOR + β3 EXCHANGERATE + β4 WPI + ε

Model: 2
ALUMINIUMFUTURESPRICE = α + β1GDP + β2 MIBOR + β3 EXCHANGERATE + β4 WPI + ε

Model: 3
CRUDEOILFUTURESPRICE = α + β1GDP + β2 MIBOR + β3 EXCHANGERATE + β4 WPI + ε

Model: 4
CARDAMOMFUTURESPRICE = α + β1GDP + β2 MIBOR + β3 EXCHANGERATE + β4 WPI + ε

Table 1: Indicators used to measure Commodity futures

price
S.NO MACROECONOMIC Measurement
INDICATORS
DEPENDENT VARIABLE
1 GOLD
2 ALUMINIUM
3 CRUDE OIL
4 CARDAMOM
INDEPENDENT VARIABLES
1 GDP Gross Domestic Product
2 MIBOR Mumbai Interbank Offer
Rate
3 WPI Whole Sale Price Index
4 EXCHANGE RATE INR/USD
Source: Compilation based on literature review
Hypothesis 1: There is a significant relationship between GDP and Commodity futures price.
Hypothesis 2: There is a significant relationship between MIBOR and Commodity futures price.
Hypothesis 3: There is a significant relationship between Exchange Rate and Commodity futures
price.
Hypothesis 4: There is a significant relationship between WPI and Commodity futures price.

REGRESSION RESULTS

Table 2: Regression results: Dependent Variable - Gold

Standardized
Unstandardized
Model coefficients Coefficients t Sig.
B Std. Error Be
ta
Constant 33060.034 44110.862 .749 .487
GDP -2222.713 2118.758 -.520 -1.049 .342
WPI 107.059 334.099 .495 .320 .762
MIBOR 603.203 1917.843 .409 .315 .766
INR/USD -298.128 406.152 -.510 -.734 .496

INTERPRETATION
Table 2 presents the regression results of macroeconomic indicators impacting on gold futures

prices. The futures price of gold is considered as dependent variable. GDP and INR/USD shows

a negative influence on Gold futures price and WPI and MIBOR shows a positive influence on

Gold futures price. The results reveal that none of the macro-economic indicators shows a

significant association with futures price of Gold.

Table 3: Regression results: Dependent Variable -ALUMINIUM
Standardize
Unstandardized d
Model coefficients t Sig.
Coefficients
B Std. Error Be
ta
Constant -69.019 118.725 -.581 .586
GDP -1.622 5.703 -.102 -.284 .787
WPI 1.873 .899 2.327 2.083 .092
MIBOR 12.355 5.162 2.250 2.394 .062
INR/USD -2.724 1.093 -1.251 -2.491 .055

INTERPRETATION
Table 3 presents the regression results of macroeconomic indicators impacting on aluminium

futures prices. The futures price of aluminium is considered as dependent variable. GDP and

INR/USD shows a negative influence on Aluminium futures price and WPI and MIBOR shows a

positive influence on Aluminium futures price. The results reveal that none of the macro-

economic indicators shows a significant association with futures price of aluminium.

Table 4: Regression results: Dependent Variable – CRUDE OIL

Standardize
Unstandardized d
Model coefficients t Sig.
Coefficients
B Std. Error Be
ta
Constant -1901.614 1067.487 -1.781 .135
GDP 145.945 51.274 .159 2.846 *.036
WPI 59.467 8.085 1.281 7.355 ***.001
MIBOR 66.089 46.412 .209 1.424 .214
INR/USD -10.087 9.829 -.080 -1.026 .352
Note: *Denotes p-value significant at 5% level, *** Denotes p-value significant at 1 % level
 INTERPRETATION

Table 4 presents the regression results of macro factors impacting on crude oil futures prices. In

this table, the various macroeconomic indicators such as GDP, MIBOR, EXCHANGE RATE,

and WPI are considered as independent variables and Crude Oil futures price is considered as

dependent variable. The results of the study highlighted that the factors such as GDP and WPI

have shown significant impact on determinants of crude oil futures price.

Table 5: Regression results: Dependent Variable - Cardamom

Standardize
Unstandardized d
Model coefficients t Sig.
Coefficients
B Std. Be
Error ta
Constant - 2657.12 -.691 .520
1835.60 3
0
GDP -77.285 127.628 -.210 -.606 .571
WPI 33.275 20.125 1.788 1.653 .159
MIBOR 224.157 115.526 1.765 1.940 .110
INR/USD -66.158 24.466 -1.315 -2.704 *.043
Note: * Denotes p-value significant at 5% level

INTERPRETATION

Table 5 presents the regression results of macroeconomic indicators impacting on cardamom

futures prices.The cardamom futures price is considered as dependent variable. The results reveal

that INR/USD shows a significant association with cardamom futures price and GDP, WPI,

MIBOR is not significantly influencing the cardamom futures price.

5.2 CANONICAL CORRELATION ANALYSIS

Harold Hotelling in 1936, introduced this concept. In statistics, canonical-correlation analysis

(CCA), also called canonical variates analysis, is a strategy of gathering information from cross-

covariance matrices . If we have duo vectors X = (X1, ..., Xn) and Y = (Y1, ..., Ym) of random

variables, and there are correlations among the variables, then canonical-correlation analysis will

discover linear fusion of X and Y which have utmost correlation with each other. T.

R. Knapp notes that "virtually all of the commonly encountered parametric tests of significance

can be treated as special cases of Canonical-correlation analysis, which is the general procedure

for examining the relationships between two sets of variables.

Eigen values and Canonical Correlations

Root No. Eigen value Pct. Cum. Pct. Canon Cor.

1 1.60833 100.00000 100.00000 .78525

Table 6: Canonical Correlations Analysis Results

Variable Hypot Error SS Hypot Error MS F Sig.

h. h. of
SS MS F

Gold 14483783. 128924820. 14483783. 25784964.1940 .561 .487

3 9 3 3

Aluminiu 63.12 933.95 63.12 186.79130 .337 .586

m

Crude Oil 47920.37 75504.1669 47920.37 15100.83338 3.173 .135

2

Cardamo 44651.05 467809.3 44651.05 93561.8 .4772 .520

m
 INTERPRETATION

Table 6 represents the Canonical Correlation results of commodity futures price on the

macroeconomic indicators. Commodity futures price of Gold, Aluminium, Crude Oil and

Cardamom are taken as a dependent variable and Macroeconomic indicators such as GDP, WPI,

MIBOR and INR/USD are taken as a independent variable. The results reveal that for every one

unit of increase in the independent variable (macroeconomic indicators), 78.525% increases in

the dependent variable (commodity futures price). Since the Eigen value is 1.60833 i.e. <10 the

model is considered to be fit.

6. FINDINGS OF THE STUDY

The finding of the study summarized as follows.

First, the regression analysis reports that commodity futures price is procyclical to GDP, WPI

and Exchange Rate and Mumbai Interbank Offered Rate (MIBOR) is counter-cyclical to

commodity futures price.

The results reveal that.

● Gross Domestic Product, MIBOR, Exchange Rate and WPI show an insignificant

relationship with gold futures price. Further it shows an insignificant association with

gold (i.e.) when the GDP, MIBOR, Exchange Rate, WPI increases it will not have a

direct impact on gold by the way of increase in price.

● Gross Domestic Product, MIBOR and Exchange Rate, WPI show an insignificant

relationship with aluminium futures price. Further it shows an insignificant association

with aluminium (i.e.) when the GDP, MIBOR, Exchange Rate, WPI increases it will not

have a direct impact on aluminium by the way of increase in price.

 ● Gross Domestic Product and Wholesale Price Index shows a significant relationship with

crude oil futures price, which indicates that crude oil futures price moves along with

these two indicators.

● Exchange Rate shows a significant relation with cardamom futures price.

Overall, the results of the study finds that the maximum impact of Commodity Futures Price

fluctuations is felt on the three indicators Gross Domestic Product, Wholesale Price Index and

Exchange Rate.

7. CONCLUSION
Among the four macroeconomic indicators, three of the macroeconomic indicators i.e. Gross

Domestic Product (GDP), Wholesale Price Index (WPI) and Exchange Rate shows a significant

relationship with commodity futures price, which means that when these three macroeconomic

indicators changes, it will have a direct impact on commodity futures price. To be more specific,

in case of Energy commodity futures price, GDP and WPI have a direct impact on price change

and in case of Agriculture Commodity futures price, Exchange Rate has a direct impact on price

change.

For an effective finding canonical correlation analysis has been done in order to find out the

combined effect of variable in the commodity futures market. Market cannot be influenced by

individual variable hence the four macroeconomic indicators has to be considered by the

economy for a market performance.

REFERENCES
1. Ahmed, F., Kashif, M., & Irfan, M. Z. (2017). Long-Run Relationship between Oil Price

and Macroeconomic Indicators using Johansen Co-integration Test: A Case of Pakistan.

RADS Journal of Social Sciencess & Business Management, 4(1), 79-95.

2. Bailey, W., & Chan, K. C. (1993). Macroeconomic influences and the variability of the

commodity futures basis. The Journal of Finance, 48(2), 555-573.

3. Borensztein, E., & Reinhart, C. M. (1994). The macroeconomic determinants of

commodity prices. Staff Papers, 41(2), 236-261.

4. Faseli, O. (2019). Ranking of US macroeconomic news impacting WTI crude oil

volatility risk. International Journal of Research in Business and Social Science, IJRBS.

5. Groen, J. J., & Pesenti, P. A. (2011, February). Commodity prices, commodity

currencies, and global economic developments. In Commodity Prices and Markets, East

Asia Seminar on Economics, Volume 20 (pp. 15-42). University of Chicago Press.

6. Haque, A., Jahan, I., Chowdhury, N. A., & Rahman, M. (2019). Commodity and

Financial Market Trends and the Growth of Bank Assets: The Case of Equity-Based

Banking. Journal of International Business and Management, 2(4), 01-12.

7. Lakshmi, P., Visalakshmi, S., & Padmavathy, S. (2015). Exploring the nexus between

futures contracts and spot returns in the Indian commodity market. International

Journal of Indian Culture and Business Management, 10(3), 306-317.

8. Mahalik, M. K., Acharya, D., & Babu, M. S. (2014). Price discovery and volatility

spillovers in futures and spot commodity markets. Journal of Advances in Management

Research.

9. Nandhini, M. CRUDE OIL AND GOLD MARKET: EVIDENCE FOR CO

INTEGRATION, RELATIONSHIP AND CO MOVEMENT.

10. Sahu, P. K., Dey, S., Sinha, K., Singh, H., & Narsimaiaha, L. (2019). Cointegration and

price discovery mechanism of major spices in India. American Journal of Applied

Mathematics and Statistics, 7(1), 18-24.

11. Shaikh, I. (2020). Does policy uncertainty affect equity, commodity, interest rates, and

currency markets? Evidence from CBOE’s volatility index. Journal of Business

Economics and Management, 21(5), 1350-1374.

12. Shen, Y., Shi, X. R., & Zeng, T. (2018). Uncertainty, Macroeconomic Activity and

Commodity Price: A Global Analysis. Available at SSRN 3280848.

13. Strpić, K., Miličević, M., & Kurevija, T. (2017). Development of Tight Oil Resources in

USA: Profitability of Exploitation and Effect of Macroeconomic Indicators in Volatile

Oil Price Environment. Rudarsko-geološko-naftni zbornik, 32(3), 23-33

14. Tomek, W. G. (1997). Commodity futures prices as forecasts. Applied Economic

Perspectives and Policy, 19(1), 23-44.

15. Tuğba, A. K. I. N., & IŞIKLI, E. The Relationship Between Credit Default Swap,

Economic Growth and Current Account Deficit: A Case of Turkey. Anemon Muş

Alparslan Üniversitesi Sosyal Bilimler Dergisi, 8(İktisadi ve İdari Bilimler), 91-98.

16. Yang, L., Motegi, K., & Hamori, S. (2018). Systemic risk and macroeconomic shocks:

Evidence from US agricultural commodity markets. Available at SSRN 3278174.

17. Watugala, S. W. (2015). Economic uncertainty and commodity futures volatility. Office

of Financial Research Working Paper, (15-14).

Further links:
REPORTS:

● Reserve Bank of India Report 2018-19

● World Bank Report 2018-19

● Indian Petroleum and Natural Gas Statistics

2018

● BP Statistical Review of World Energy

2019

● Petroleum planning and Analysis cell 2018

● Central Statistic Organization 2019

● EXIM bank

● Ministry of Commerce and industry

URL’S:

● eaindustry.nic.in

● investing.com

● www.opec.org

● www.data.gov.in

● https://www.imf.org

● https://fbil.org.in