Overview of the Indian Commodity Market Finance Essay

In India market for futures are from a very long time back , it was there in early 1800s. After Independence, the Forward Contracts (Regulation) Act, 1952 (FCRA, 1952) was passed to promote and regulate this market with Forward Markets Commission (FMC) being set up in 1953 in Mumbai as the regulator. "Commodity derivatives were banned in the late '60s, but were revived again in the '80s.After the successful equity market reforms of the '90s, the Government of India tried to replicate similar reforms for the commodity derivatives markets and in 1999 suggested that the Minimum Support Price (MSP)as a price-hedging instrument could be replaced with derivatives markets. National-level multi-commodity exchanges were permitted to be set up on conditions of being backed by internationally prevailing best practices of trading, clearing and settlement.

The national commodity exchanges follow electronic, transparent trading and clearing with novation, similar to the equity market [See Box 2]. At present, 105 commodities have been approved for trading out of which 95 commodities are actively traded. The development of the commodity derivatives market in India like many other countries has been hindered by policy reversals on concerns regarding its effect on prices and supplies of essential commodities." This apart, integration of spot and futures market is cited as a critical factor for further growth of commodity futures in India. According to Nair (2004), the major stumbling block for the development of commodity futures markets in India is the fragmented physical/spot market with government laws and various taxes that hinder the free movement of commodities critique draws attention to the prevalence of bilateral deals in local exchanges, the lack of price transparency both in the (fragmented) futures and spot markets for many commodities and the absence of certified warehouses.

At present 22 Exchanges are recognised/registered for forward/futures trading in commodities. Most of the commodity exchanges in India are single commodity platforms and cater mainly to the regional requirements. However, three national-level multi-commodity exchanges have been set up in the country to overcome the problem of fragmentation. These exchanges are:

1.  National Multi Commodity Exchange of India (NMCE)
2. Multi Commodity Exchange of India (MCX)
3. National Commodity & Derivatives Exchange of India (NCDEX)

NMCE (National Multi Commodity Exchange of India) - It is the first state of the demutualized multi-commodity Exchange, National Multi Commodity Exchange of India Ltd. (NMCE) was promoted by commodity-relevant public institutions, viz., Central Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State Agricultural Marketing Board (GSAMB), National Institute of Agricultural Marketing (NIAM), and Neptune Overseas Limited (NOL). While various integral aspects of commodity economy, viz., warehousing, cooperatives, private and public sector marketing of agricultural commodities, research and training were adequately addressed in structuring the Exchange, finance was still a vital missing link. Punjab National Bank (PNB) took equity of the Exchange to establish that linkage. Even today, NMCE is the only Exchange in India to have such investment and technical support from the commodity relevant institutions. These institutions are represented on the Board of Directors of the Exchange and also on various committees set up by the Exchange to ensure good corporate governance.. NMCE commenced futures trading in 24 commodities on 26th November, 2002 on a national scale and the basket of commodities has grown substantially since then to include cash crops, food grains, plantations, spices, oil seeds, metals & bullion among others..

MCX( Multi Commodity Exchange of India ) :- Headquartered in Mumbai, Multi Commodity Exchange of India Ltd (MCX) is a state-of-the-art electronic commodity futures exchange. The demutualised Exchange has permanent recognition from the Government of India to facilitate online trading, and clearing and settlement operations for commodity futures across the country. Having started operations in November 2003, today, MCX holds a market share of over 85%* (as on March 31, 2012 MCX had a market share of 86%) of the Indian commodity futures market. The Exchange has more than 2,170 registered members operating through over 3,46,000 including CTCL trading terminals spread over 1,577 cities and towns across India. MCX was the third largest commodity futures exchange in the world, in terms of the number of contracts traded in CY2011

 PURPOSE OF THE STUDY

In India, as derivatives only futures trading in commodities is allowed. These trading are delineated into agriculture and non agriculture commodities. There has to be a systematic approach to reap benefits from commodity futures. These markets are driven by news, rumors, data release aspects and many more .These all things sometimes results in market volatility so assessing the risk mitigation possibility through use of futures is necessary and also the use of other derivative instruments like options. These complicated aspects make the research desk inevitable in brokerage firm. Hence the study is useful to understand the future market trends , analyze the hedging effectiveness of commodity futures and the need of options in commodity market.

 SIGNIFICANCE OF THE STUDY

To get to know the hedging effectiveness of the futures as it is many times talked that the futures increases speculative trading rather than hedging tool and to find out wheather price discovery mechanism is there and how efficient is it in hedging price risk, It also covers the need of commodity option in the market and its use as an hedging tool.

LIMITATION OF STUDY

The study is limited to Kolkata and Bangalore brokerage houses only.

Limited number of respondents i.e.50 as it was not easy to get data from the corporate.

Time constraint was a major limitation.

Not covered the industrialist and farmers who trade in commodity market to hedge the production risk..

INTRODUCTION

This part of the research paper shows the detailed analysis and related interpretation of the collected data in a detailed manner . This analysis and interpretation is based on the research methodology mentioned in Chapter 3 and the micro analysis of the Indian commodity market .In this Chapter initially the analysis of the respondents is done and then it moves on to analyse the the primary data and further to conclude a secondary research is also done from the data sources as earlier mentioned in Chapter 3.

RESPONDENTS PROFILE

The number of respondents taken in for this research is 50. Basically the respondents are those people who trade in commodity market. Majority of respondents are from Kolkata and Bangalore, respondents are from all the age groups . Out of 50 , 20% of respondents are professional people like Chartered Accountants, Company Secretary, and MBA who trade in commodity and other financial instruments and rest are the people who trade in commodity market, respondents also includes the people orking in for brokerage houses who deals in commodity.

ANALYSIS OF DATA

The analysis is done on both primary data and Secondary Data.

Exchange in which respondents trade.

 

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