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

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 DECLARATION

Title of Project Report

Study Of Operations Of Various Financial Market With Special Emphasis On Commodity

Market In India

I declare

(a)That the work presented for assessment in this Summer Internship Report is my own, that it
has not previously been presented for another assessment and that my debts (for words, data,
arguments and ideas) have been appropriately acknowledged

(b)That the work conforms to the guidelines for presentation and style set out in the relevant
documentation.

Date:
Siddharth
Agarwal

A0101912142

MBA class of 2014

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 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.

Ms. Swati Bhatnagar

Assistant Professor

Department of Marketing

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 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.

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 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 Market…………………………………………………11

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

Annexure…………………………………………………………………………………………61

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 List of Tables
1.1 Commodity exchange in India and commodities traded………………………………21

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 market…………………………………………………41

4.4 Preference of investors in commodity market……………………………………………….42

4.5 Index preference of investors………………………………………………………………..42

4.6 Reason for resistance in commodity market…………………………………………………43

4.7 Source of information to investors…………………………………………………………..43

4.8 Rating of investors towards various attributes ……………………………………………...44

List of Figures
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1.1 Indian commodity future exchange………………………………………………………..21

1.2 Working of commodity market……………………………………………………………22

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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 CHAPTER 1: INTRODUCTION

IIFL (India Infoline group), comprising the holding company, India Infoline Ltd (NSE:
INDIAINFO,BSE: 532636) and its subsidiaries, is one of one of India’s 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 India’s 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

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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
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, IIFL’s 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, IIFL’s 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%.

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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.
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.
IIFL’s 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.
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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.
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

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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
reduce or eliminate this risk.

2. Speculators: Speculators are participants who wish to bet on future movements in the
price of an asset. Futures and options contracts can give them leverage; that is, by
putting in small amounts of money upfront, they can take large positions on the market.
As a result of this leveraged speculative position, they increase the potential for large
gains as well as large losses.

3. Arbitragers: Arbitragers work at making profits by taking advantage of discrepancy

between prices of the same product across different markets. If, for example, they see
the futures price of an asset getting out of line with the cash price, they would take
offsetting positions in the two markets to lock in the profit.

1.1.3 Economic functions performed with the help of derivative market:

• Prices in an organized derivatives market reflect the perception of market participants

about the future and lead the prices of underlying to the perceived future level. The
prices of derivatives converge with the prices of the underlying at the expiration of the
derivative contract. Thus, derivatives help in discovery of future as well as current
prices.
• The derivatives market helps to transfer risks from those who have them but may not like
them to those who have an appetite for them.
• Derivatives, due to their inherent nature, are linked to the underlying cash markets.
• With the introduction of derivatives the underlying market witnesses higher trading
volumes, because of participation by more players who would not otherwise participate
for lack of an arrangement to transfer risk.
• Speculative traders shift to a more controlled environment of the derivatives market. In
the absence of an organized derivatives market, speculators trade in the underlying cash
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 markets. Margining, monitoring and surveillance of the activities of various participants
become extremely difficult in these kinds of mixed markets.
• An important incidental benefit that flows from derivatives trading is that it acts as a
catalyst for new entrepreneurial activity. Derivatives have a history of attracting many
bright, creative, well-educated people with an entrepreneurial attitude. They often
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

1.1.4 Types of derivative markets

Derivatives markets can broadly be classified as commodity derivatives market and financial
derivatives markets. As the name suggest, commodity derivatives markets trade contracts are
those for which the underlying asset is a commodity. It can be an agricultural commodity like
wheat, soybeans, rapeseed, cotton, etc or precious metals like gold, silver, etc. or energy
products like crude oil, natural gas, coal, electricity etc. Financial derivatives markets trade
contracts have a financial asset or variable as the underlying. The more popular financial
derivatives are those which have equity, interest rates and exchange rates as the underlying. The
most commonly used derivatives contracts are forwards, futures and options.

Spot versus Forward Transaction

Every transaction has three components - trading, clearing and settlement. A buyer and seller
come together, negotiate and arrive at a price. This is trading. Clearing involves finding out the
net outstanding, that is exactly how much of goods and money the two should exchange. For
instance, A buys goods worth Rs.100 from B and sells goods worth Rs. 50 to B. On a net basis,
A has to pay Rs. 50 to B. Settlement is the actual process of exchanging money and goods.
Using the example of a forward contract, let us try to understand the difference between a spot
and derivatives contract.
In a spot transaction, the trading, clearing and settlement happens instantaneously, i.e. 'on the
spot'. Consider this example. On 1st January 2010, Aditya wants to buy some gold. The
goldsmith quotes Rs. 17,000 per 10 grams. They agree upon this price and Aditya buys 20 grams
of gold. He pays Rs.34,000, takes the gold and leaves. This is a spot transaction.
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Now suppose, Aditya does not want to buy the gold on the 1st January, but wants to buy it a
month later. The goldsmith quotes Rs. 17,100 per 10 grams. They agree upon the 'forward' price
for 20 grams of gold that Aditya wants to buy and Aditya leaves. A month later, he pays the
goldsmith Rs. 34,200 and collects his gold. This is a forward contract, a contract by which two
parties irrevocably agree to settle a trade at a future date, for a stated price and quantity. No
money changes hands when the contract is signed. The exchange of money and the underlying
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.

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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
exchange's self-regulatory organization, although they are affected indirectly by national
legal systems, banking supervision and market surveillance.

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.

1.1.5 Difference Between Commodity And Financial Derivatives

The basic concept of a derivative contract remains the same whether the underlying happens to
be a commodity or a financial asset. However, there are some features which are very peculiar to
commodity derivative markets. In the case of financial derivatives, most of these contracts are
cash settled. Since financial assets are not bulky, they do not need special facility for storage
even in case of physical settlement. On the other hand, due to the bulky nature of the underlying
assets, physical settlement in commodity derivatives creates the need for warehousing. Similarly,
the concept of varying quality of asset does not really exist as far as financial underlying are
concerned. However, in the case of commodities, the quality of the asset underlying a contract
can vary largely. This becomes an important issue to be managed. We have a brief look at these
issues.

Physical Settlement
Physical settlement involves the physical delivery of the underlying commodity, typically at an
accredited warehouse. The seller intending to make delivery would have to take the commodities
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to the designated warehouse and the buyer intending to take delivery would have to go to the
designated warehouse and pick up the commodity. This may sound simple, but the physical
settlement of commodities is a complex process. The issues faced in physical settlement are
enormous. There are limits on storage facilities in different states. There are restrictions on
interstate movement of commodities. Besides state level octroi and duties have an impact on the
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

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was entered into and the time the contract was closed. For instance, if a trader buys futures on a
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
xvii
Department of Consumer Affairs specifies standards for processed agricultural commodities.
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 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.

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:

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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.
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.
 Maintaining buffer stock and better allocation of resources as it augments reduction in
inventory requirement and thus the exposure to risks related with price fluctuation
declines. Resources can thus be diversified for investments.
 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.
 Flexibility, certainty and transparency in purchasing commodities facilitate bank
financing. Predictability in prices of commodity would lead to stability, which in turn
would eliminate the risks associated with running the business of trading commodities.
This would make funding easier and less stringent for banks to commodity market
players.

Benefits of Commodity Futures Markets:-

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.

xix
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
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.

xx
 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
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
xxi
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 19th
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
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. That’s 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.

xxii
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.

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
xxiii
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
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 else’s 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.
xxiv
In India there are 25 recognized future exchanges, of which there are three national level multi-
commodity 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
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
xxv
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.

National Commodities & Derivatives Exchange Limited (NCDEX)

National Commodities & Derivatives Exchange Limited (NCDEX) promoted by ICICI Bank
Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank of Agriculture
and Rural Development (NABARD) and National Stock Exchange of India Limited (NSC).
Punjab National Bank (PNB), Credit Rating Information Service of India Limited (CRISIL),
Indian Farmers Fertilizer Cooperative Limited (IFFCO), Canara Bank and Goldman Sachs by
subscribing to the equity shares have joined the promoters as a share holder of exchange.
NCDEX is the only Commodity Exchange in the country promoted by national level institutions.
NCDEX is a public limited company incorporated on 23 April 2003. NCDEX is a national level
technology driven on line Commodity Exchange with an independent Board of Directors and
professionals not having any vested interest in Commodity Markets.
It is committed to provide a world class commodity exchange platform for market participants to
trade in a wide spectrum of commodity derivatives driven by best global practices,
professionalism and transparency.
NCDEX is regulated by Forward Markets Commission (FMC). NCDEX is also subjected to the
various laws of land like the Companies Act, Stamp Act, Contracts Act, Forward Contracts
Regulation Act and various other legislations.
NCDEX is located in Mumbai and offers facilities to its members in more than 550 centers
throughout India. NCDEX currently facilitates trading of 57 commodities.

Multi Commodity Exchange of India Limited (MCX)

Multi Commodity Exchange of India Limited (MCX) is an independent and de-mutulized
exchange with permanent reorganization from Government of India, having Head Quarter in
Mumbai. Key share holders of MCX are Financial Technologies (India) Limited, State Bank of
India, Union Bank of India, Corporation Bank of India, Bank of India and Canara Bank. MCX
facilitates online trading, clearing and settlement operations for commodity futures market across
the country. MCX started of trade in Nov 2003 and has built strategic alliance with Bombay
xxvi
Bullion Association, Bombay Metal Exchange, Solvent Extractors Association of India, pulses
Importers Association and Shetkari Sanghatana.MCX deals with about 100 commodities.

National Multi Commodity Exchange of India Limited (NMCEIL)

National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-mutualised
Electronic Multi Commodity Exchange in India. On 25th July 2001 it was granted approval by
Government to organize trading in edible oil complex. It is being supported by Central
warehousing Corporation Limited, Gujarat State Agricultural Marketing Board and Neptune
Overseas Limited. It got reorganization in Oct 2002. NMCEIL Head Quarter is at Ahmedabad.
Some of the features of national and regional exchanges are listed below:
National Exchanges
• Compulsory online trading
• Transparent trading
• Exchanges to be de-mutualised
• Exchange recognized on permanent basis
• Multi commodity exchange
• Large expanding volumes
Regional Exchanges
• Online trading not compulsory
• De-mutualisation not mandatory
• Recognition given for fixed period after which it could be given for re regulation
• Generally, these are single commodity exchanges. Exchanges have to apply for trading
each commodity.
• Low volumes in niche markets

Figure 1.1

xxvii
Table 1.1 Commodity Exchanges in India and commodities traded

No. Exchanges Main Commodities

Gold, Silver, Copper, Crude Oil, Zinc, Lead, Nickel,

1 Multi Commodity
Exchange of India Ltd.,
Mumbai*
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

2 National Commodity &
Derivatives Exchange Ltd,
Mumbai*
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
Soya Oil, Zinc, Rubber, Chana\Gram, Isabgul, Lead,
Exchange of India Gold,
Limited, Ahmedabad* Aluminium, Copper, Turmeric, Copra, Silver, Raw Jute,
Guar Gum, Pepper, Coffee Robusta, Castor Seeds, Mentha
Oil

How Commodity market works?

There are two kinds of trades in commodities. The first is the spot trade, in which one pays cash
and carries away the goods. The second is futures trade. The underpinning for futures is the
warehouse receipt. A person deposits certain amount of say, good X in a ware house and gets a
warehouse receipt. Which allows him to ask for physical delivery of the good from the
xxviii
warehouse. But someone trading in commodity futures need not necessarily posses such a receipt
to strike a deal. A person can buy or sale a commodity future on an exchange based on his
expectation of where the price will go. Futures have something called an expiry date, by when
the buyer or seller either closes (square off) his account or give/take delivery of the commodity.
The broker maintains an account of all dealing parties in which the daily profit or loss due to
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

xxix
 - Execution
- Matching
- Reporting
- Surveillance
- Price limits
- Position limits
II. Clearing: - This stage has following system in place-
- Matching
- Registration
- Clearing
- Clearing limits
- Notation
- Margining
- Price limits
- Position limits
- Clearing house.
III. Settlement: - This stage has following system followed as follows-
- Marking to market
- Receipts and payments
- Reporting
- Delivery upon expiration or maturity.

Current Scenario in Indian Commodity Market

Need of Commodity Derivatives for India:-
India is among top 5 producers of most of the Commodities, in addition to being a major
consumer of bullion and energy products. Agriculture contributes about 22% GDP of Indian
economy. It employees around 57% of the labor force on total of 163 million hectors of land
Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates
that India can be promoted as a major centre for trading of commodity derivatives.

Table 1.2 Commodity Futures Trade in India (Rs Lakhs Crores)

Category for April to February FY2012-13
xxx
Total 157.828
Bullion 73.26
Agro 20.203
Metals 29.951
Energy 34.4

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 India’s 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 Association’s 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

xxxi
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
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%).

xxxii
Table 1.3 Total volume and value of trade during the quarter (January 2013 to March 2013) in
the major commodity exchanges

Volume of Value (` in % share (In

Name of Exchange Trade value
(In lakh tons) Crore) terms)
Multi Commodity Exchange of India 2284.77 3606867.16 88.31
Ltd., Mumbai
National Commodity & Derivatives 678.79 292014.68 7.15
Exchange Ltd., Mumbai
National Multi Commodity Exchange 84.21 61967.85 1.52
of India Ltd., Ahmedabad
Indian Commodity Exchange Ltd., 136.08 75131.51 1.83
Mumbai
ACE Derivatives & Commodity 56.20 33428.45 0.82
Exchange Ltd., Mumbai
Total of top 5 exchanges 3240.05 4069409.65 99.63

Others 32.24 14982.82 0.37

Grand total 3272.29 4084392.47 100.00

Note: Natural Gas volumes are not included in the Total Volume

xxxiii
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
% share to the total value
(In ` crores)
SILVER 936279.660 25.96
GOLD 906262.427 25.13
CRUDEOIL 653661.839 18.12
COPPER 293087.998 8.13
NATURAL GAS 221621.380 6.14
LEAD 212341.570 5.89
ZINC 137550.888 3.81
NICKEL 101419.834 2.81
Total of major commodities 3462225.596 95.99
Other commodities 144641.563 4.01
Total 3606867.158 100.00

xxxiv
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 % share to the total value
(In `crores)
SOYA_OIL 101121.123 34.63
SOYABEAN 39302.174 13.46
CASTOR_SEED 24150.850 8.27
DHANIYA 22826.798 7.82
R/M SEED 17693.340 6.06
CHANA 16396.567 5.61
COTTON_CAKE 15867.319 5.43
KAPAS 13025.696 4.46
JEERA 10493.146 3.59
TURMERIC 10022.351 3.43
Total of major
commodities 270899.364 92.769
Other commodities 21115.320 7.23
Total 292014.684 100.00

35
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.
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 Total Value in `Crore
total value
RAW JUTE 5992.41 9.67
COFFEE REP BULK 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

36
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.
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

37
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.
Table 1.8 Top commodities traded on ACE during the quarter (January 2013 to March
2013)
Total value % share to the total
Commodities
(In `crores) Value
REFSOYOIL 23916.861 71.55
RBD 2905.998 8.69
SOYMEAL 2499.456 7.48
COTTON118 2455.443 7.35
Total of major
31777.758 95.06
commodities
Other commodities 1650.690 4.94
Total 33428.448 100.00

38
 Chapter 2: Literature Review

(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

39
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.

(Christopher Gilbert, March 2010),Main purpose of this study was to quantify the
effect of “bubble behavior”, possibly resulting from extrapolative expectations and
index-based investment on commodity futures prices between 2006 and 2000.The
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 2006-
08.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

40
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.

(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.

41
 CHAPTER 3: RESEARCH METHODOLOGY

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.

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.

42
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:

 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.

43
 CHAPTER 4: Analysis and Interpretation

1) Analysis of investor‘s preferences

The survey was conducted to capture investor objective for investment in financial instruments, reveals
the following.

Graph 4.1
High growth 66

Tax benefits 22

Retirement protection 10

Future welfare 75

Reasonable income and safety 63

Stable income 17

High income 25
0 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

100
90
90 84
79
80
70
60
50
40
30
20 15
10 3
0
Equity market Commodity Currency Real estate Mutual funds
market market

Frequency

44
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

Chart Title
Equity Commodity Currency Real estate Mutual fund

1
13 1

24 61
79
6
18

7
8 21
0 3

78
5 61
66 1

1
12
23 1
1 9
Highly favourable Favourable Somewhat favourable Not very favourable Not at all favourable

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.

45
4) Preference of investors investing in Commodity market

Graph 4.4

Frequency
2%

24% Bullions
Agro products
Energy
Metals

58%
16%

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.

5)Index preference of investors

Graph 4.5

Frequency
1%

29% MCX
NCDEX
NCFM

70%

Mostly investors prefer to deal on NCDEX platform even though MCX platform being the largest
platform for Commodity trading in India.

46
6) Why people resist in investing in Commodity market

Graph 4.6

Frequency

23%
Lack of knowledge
38% Difficulty in understanding
Increase speculation
Very risky

39%

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.

7) Source of information to investors

Graph 4.7

Frequency
100%
80%
60%
40%
Axis Title 20%
0%
s l) ... es on ts et
oup era sin zin isi gen rn
r en u a lev A te
eg s(G es
(B ag Te s/ In
enc r ar l m ker
r pe p cia o
fe pa pa an Br
Re s s n
w
Ne
w Fi
Ne
47
From the above analysis we can infer that most of the investors are gathering data from newspapers and
from the brokers/agents.

8) Ratings of investors for Commodity market on various attributes.

Graph 4.8

70

60

50

40
Very low
30
Low
Neutral
20 High
very high
10

0
ty ty ilit
y rn on n
afe uid ix b etu ic ati atio
S c
Liq Fle od
r
re sifi
pp r
Go l a Di
ve
ta
api
C

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.

48
 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

What is your prefernce of investment yes 2 21 23

horizon- Short term no 4 73 77
Total 6 94 100

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

What is your prefernce of investment yes 12 11 23

horizon- Short term no 34 43 77
Total 46 54 100

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

What is your preference of investment yes 9 14 23

horizon- Short term no 38 39 77
Total 47 53 100

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

What is your preference of investment yes 2 42 44

horizon- Long term no 4 52 56
Total 6 94 100

49
 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

What is your preference of investment yes 24 20 44

horizon- Long term no 23 33 56
Total 47 53 100

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

What is your preference of investment yes 18 26 44

horizon- Long term no 28 28 56
Total 46 54 100

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

What is your preference of investment yes 2 28 30

horizon- Medium term no 4 66 70
Total 6 94 100

50
 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

What is your preference of investment yes 14 16 30

horizon- Medium term no 33 37 70
Total 47 53 100

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

What is your preference of investment yes 14 16 30

horizon- Medium term no 32 38 70
Total 46 54 100

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

51
 Annual income * Investment portion of your income invested Cross tabulation
Table 4.10

Investment portion of your income invested

below 10% 10-15 % 15-20% above 20% Total

Annual income below 100000 16 0 0 0 16

100000-200000 6 0 0 0 6

200000-300000 35 5 1 0 41

above 300000 18 14 4 1 37
Total 75 19 5 1 100

In the above analysis we can see that a majority of investors lie between the income group of 200000-
300000 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.

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 markets-
Equity

highly somewhat not very not at all

favourable Favourable favourable favourable favourable Total

In which financial market yes 1 23 61 5 0 90

do you invest- Equity No 0 0 5 4 1 10
market
Total 1 23 66 9 1 100

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.

52
 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 markets-
Commodity

highly somewhat not very not at all

favourable favourable favourable favourable favourable Total

In which financial market yes 4 60 17 3 0 84

do you invest- no 1 1 4 9 1 16
Commodity market
Total 5 61 21 12 1 100

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.

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

somewhat not very not at all

favourable favourable favourable favourable Total

In which financial market do yes 1 5 9 0 15

you invest- Currency market no 2 13 69 1 85
Total 3 18 78 1 100

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.

53
 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

somewhat not very not at all

favourable favourable favourable favourable Total

In which financial market do yes 1 2 0 0 3

you invest- Real estate no 7 22 61 7 97
Total 8 24 61 7 100

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.

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 markets-
Mutual fund

highly somewhat not very not at all

favourable favourable favourable favourable favourable Total

In which financial market yes 6 70 3 0 0 79

do you invest- Mutual no 0 9 10 1 1 21
funds
Total 6 79 13 1 1 100

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

54
 In which financial market do you invest- Equity market * Occupation Cross tabulation
Table 4.16

Occupation

business profession self-employed others Total

In which financial market do you yes 30 36 21 3 90

invest- Equity market no 1 4 2 3 10
Total 31 40 23 6 100

In which financial market do you invest- Commodity market * Occupation Cross tabulation
Table 4.17

Occupation

business profession self-employed others Total

In which financial market do you yes 27 33 21 3 84

invest- Commodity market no 4 7 2 3 16
Total 31 40 23 6 100

In which financial market do you invest- Mutual funds * Occupation Cross tabulation
Table 4.18

Occupation

business profession self-employed others Total

In which financial market do you yes 24 32 19 4 79

invest- Mutual funds no 7 8 4 2 21
Total 31 40 23 6 100

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

What is your investment objective- High income * Age Crosstabulation

Table 4.19

Age

25-30 30-35 35-40 40above Total

What is your investment objective- yes 9 6 7 3 25

High income no 19 27 15 14 75
Total 28 33 22 17 100

55
 What is your investment objective- High income * Age Crosstabulation
Table 4.19

Age

25-30 30-35 35-40 40above Total

What is your investment objective- yes 9 6 7 3 25

High income no 19 27 15 14 75

What is your investment objective- Stable income * Age Crosstabulation

Table 4.20

Age

25-30 30-35 35-40 40above Total

What is your investment objective- yes 4 3 5 5 17

Stable income no 24 30 17 12 83
Total 28 33 22 17 100

What is your investment objective- Reasonable income and safety * Age Crosstabulation
Table 4.21

Age

25-30 30-35 35-40 40above Total

What is your investment objective- yes 17 26 11 9 63
Reasonable income and safety no 11 7 11 8 37
Total 28 33 22 17 100

What is your investment objective- Future welfare * Age Crosstabulation

Table 4.22

Age

25-30 30-35 35-40 40above Total

What is your investment objective- yes 18 23 19 15 75

Future welfare no 10 10 3 2 25
Total 28 33 22 17 100

56
 What is your investment objective- Retirement protection * Age Cross tabulation
Table 4.23

Age

25-30 30-35 35-40 40above Total

What is your investment objective- yes 0 1 1 8 10

Retirement protection No 28 32 21 9 90
Total 28 33 22 17 100

What is your investment objective- Tax benefit * Age Crosstabulation

Table 4.24

Age

25-30 30-35 35-40 40above Total

What is your investment objective- yes 2 1 5 14 22

Tax benefit no 26 32 17 3 78
Total 28 33 22 17 100

What is your investment objective-High growth * Age Crosstabulation

Table 4.25

Age

25-30 30-35 35-40 40above Total

What is your investment objective- yes 18 28 15 5 66

High growth no 10 5 7 12 34
Total 28 33 22 17 100

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%

57
 ANOVA
Table 4.26

Sum of Squares Df Mean Square F Sig.

Between Groups 4.737 3 1.579 4.590 .005

Within Groups 33.023 96 .344
Total 37.760 99

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%

ANOVA
Table 4.27

Sum of Squares df Mean Square F Sig.

What is your investment Between Groups .044 1 .044 .232 .631

objective- High income Within Groups 18.706 98 .191

Total 18.750 99
What is your investment Between Groups .170 1 .170 1.197 .277
objective- Stable income Within Groups 13.940 98 .142
Total 14.110 99
What is your investment Between Groups .562 1 .562 2.420 .123
objective- Reasonable Within Groups 22.748 98 .232
income and safety Total 23.310 99
58
What is your investment Between Groups .399 1 .399 2.130 .148
objective- Future welfare Within Groups 18.351 98 .187
Total 18.750 99
What is your investment Between Groups .064 1 .064 .700 .405
objective- Retirement Within Groups 8.936 98 .091
protection Total 9.000 99
What is your investment Between Groups .309 1 .309 1.797 .183
objective- Tax benefit Within Groups 16.851 98 .172
Total 17.160 99
What is your investment Between Groups 1.553 1 1.553 7.289 .008
objective-High growth Within Groups 20.887 98 .213

Total 22.440 99

16) Annova between Awareness of commodity market and various sources.

FORMATION OF HYPOTHESIS
H0:There is no significant difference between Awareness of commodity market and various
sources.
H1:There exists significance difference between Awareness of commodity market and various
sources.
Level of significance = 5%

ANOVA
Table 4.28

Sum of Squares df Mean Square F Sig.

How do you come to know Between Groups .376 1 .376 1.573 .213
about the commodity Within Groups 23.414 98 .239
market- Reference groups Total 23.790 99
How do you come to know Between Groups .000 1 .000 .010 .921
about the commodity Within Groups .990 98 .010
market- Total .990 99
Newspapers(general)
How do you come to know Between Groups .765 1 .765 7.105 .009
about the commodity Within Groups 10.545 98 .108
market- Total 11.310 99
Newspapers(Business)
How do you come to know Between Groups .040 1 .040 .248 .620
about the commodity Within Groups 15.960 98 .163
59
market- Financial magazines Total 16.000 99
How do you come to know Between Groups .401 1 .401 1.715 .193
about the commodity Within Groups 22.909 98 .234
market- Television Total 23.310 99
How do you come to know Between Groups .765 1 .765 7.105 .009
about the commodity Within Groups 10.545 98 .108
market- Brokers/agents Total 11.310 99
How do you come to know Between Groups .003 1 .003 .052 .820
about the commodity Within Groups 4.747 98 .048
market- Internet Total 4.750 99

17) Independent T test between Investment purpose and Gender

FORMATION OF HYPOTHESIS
H0:There is no significant difference between investment purpose and gender.
H1:There exists significance difference between investment purpose and gender.
Level of significance = 5%

Independent Samples Test

Table 4.29

Levine's Test for

Equality of
Variances t-test for Equality of Means

95% Confidence
Interval of the

Sig. (2- Mean Std. Error Difference

F Sig. t df tailed) Difference Difference Lower Upper

What is your Equal variances 22.081 .000 - 98 .043 -.182 .089 -.358 -.006
investment assumed 2.055
objective- High Equal variances - 92.790 .029 -.182 .082 -.345 -.019
income not assumed 2.221
What is your Equal variances 2.112 .149 -.706 98 .482 -.055 .078 -.211 .100
investment assumed
objective- Equal variances -.731 83.746 .467 -.055 .076 -.206 .095
Stable income not assumed
60
What is your Equal variances 37.812 .000 2.966 98 .004 .287 .097 .095 .479
investment assumed
objective- Equal variances 3.153 89.662 .002 .287 .091 .106 .468
Reasonable not assumed
income and
safety
What is your Equal variances 5.154 .025 1.072 98 .287 .097 .090 -.082 .275
investment assumed
objective- Equal variances 1.111 83.998 .270 .097 .087 -.076 .269
Future welfare not assumed
What is your Equal variances 6.045 .016 - 98 .245 -.073 .062 -.197 .051
investment assumed 1.170
objective- Equal variances - 95.663 .201 -.073 .057 -.185 .040
Retirement not assumed 1.288
protection
What is your Equal variances 42.069 .000 - 98 .010 -.221 .084 -.387 -.054
investment assumed 2.633
objective- Tax Equal variances - 97.947 .004 -.221 .074 -.367 -.074
benefit not assumed 2.982
What is your Equal variances 2.051 .155 .686 98 .495 .068 .099 -.128 .264
investment assumed
objective-High Equal variances .694 78.427 .490 .068 .098 -.127 .262
growth not assumed

CHAPTER 5: CONCLUSION and RECOMMENDATIONS

61
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,
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

62
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
investor‘s 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
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

63
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
 www.cmegroup.com
 www.commodityonline.com/Futures-trading/market-report/India-commodity.futures.trade.value-
at-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-
Growth-Roles-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
64
  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

Survey on Investors attitude towards Commodity

Market.
This questionnaire is a part of my summer internship at India Infoline Pvt ltd (IIFL). Your response would be
very useful for my research. All the responses will be kept confidential. Thanks for your cooperation. :)

(The IIFL (India Infoline) group, comprising the holding company, India Infoline Ltd and its subsidiaries,
is one of India’s 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

65
4. Occupation
Mark only one oval.

Business
Profession
Self-employed
Others

66
5. Annual income
Mark only one oval.

Below 100000 100000-200000 200000-

300000 Above 300000

6. Investment portion of your income

Mark only one oval.

Below 10% 10-15% 15-20% Above

20%

7. Do you invest money in financial market?

Mark only one oval.

Yes
NO

8. In which financial market do you invest?

(You can tick more than one)
Check all that apply.

Equity market
Commodity market
Currency market
Real estate
Mutual funds
Others

67
9. What is your current market attitude towards the following financial markets?
Mark only one oval per row.

Highly Somewhat Not very Not at all

Favourable
favourable favorable favourable favourable

Equity

Commodity

Currency

Real estate

Mutual fund

10. What is your preference of investment horizon?

(You can tick more than one)
Check all that apply.

Short term
Long term
Medium

11. What is your risk taking capacity?

(You can tick more than one)
Check all that apply.

High
Medium
Low

12. What is your investment objective?

(You can tick more than one)
Check all that apply.

High income
Stable income
Reasonable income and safety
For future welfare
Retirement protection
Tax benefit
68
High growth

69
13. Are you aware of commodity market?
Mark only one oval.

Yes
No

14. How do you come to know about the commodity market?

(You can tick more than one)
Check all that apply.

Reference groups
Newspapers(general)
Newspapers(business)
Financial magazines
Television
Brokers/Agents
Internet
Others

15. Do you invest in commodity market?

Mark only one oval.

Yes
No

16. How long have you been trading in commodity market?

Mark only one oval.

Below 1 year 1-2

years 2-3 years

Above 3 years

17. What is the frequency of your trading?

Mark only one oval.

Daily
Weekly
Monthly

70
Every season
Occasionally
Rarely

71
18. In which commodity do you invest?
(You can tick more than one)
Check all that apply.

Bullion(Gold, Silver)
Agro products(sugar,rmseed,etc)
Energy( crudeoil,petroleum,gas,etc)
Metals(steel,copper)

19. What type of investment do you prefer?

(You can tick more than one)
Mark only one oval.

Future contarcts
Forward contracts
Options
Basic payoffs

20. How do you rate commodity market on the basis of following attributes?
Mark only one oval per row.

1 Very low 2 Low 3 Neutral 4 High 5 Very high

Safety

Liquidity

Flexibility

Good return

Capital appreciation

Diversification

21. Which commodity exchange do you prefer for investment?

(You can tick more than one)
Check all that apply.

MCX
NCDEX
NMCF

72
Others

73
22. Why people do not invest in commodity market?
(You can tick more than one)
Check all that apply.

Lack of knowledge
Difficulty in understanding
Increase speculation
Very risky

23. Would you recommend others to enter into commodity market?

Mark only one oval.

Definitely
Probably
Not sure
Probably not
Never

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