Commodity trading still to find anchor

Written by Sanjeeb Mukherjee | Dhimant Bhatt | Updated: Dec 31 2008, 06:27am hrs
Way back in the eighteenth century when many countries around the globe were not even aware of futures trading in commodities, a group of Indian traders in the countrys commercial capital of Mumbai were already dictating global cotton prices.

Such was the credibility and hold of Bombay Cotton Trade Association on the world cotton trade that closing price here was almost taken as the benchmark opening price in faraway Chicago, which housed the Chicago Board of Trade (CBOT).

Since those days to now, Indian commodity futures trading in India has undergone a sea change, some for the betterment of the markets, some for reasons just opposite to that.

The biggest change came in the year 2003, when following the recommendations of the Kabra Committee, the government mandated the Forward Markets Commission (FMC) to regulate commodity futures trading in India.

Post that India saw the start of a period of massive explosion in commodity futures trade in India. Three national exchanges having most modern trading technologies were born. The National Commodity and Derivatives Exchange of India, the Multi Commodity Exchange of India (MCX) and the National Multi Commodity Exchange (NMCE) were the first truly national commodity exchanges, offering traders a platform to trade in futures from anywhere in the country, although the exchanges were headquartered in Mumbai.

The last decade was the time when not only the three exchanges flourished and grew, but also when government took commodity trading as an important factor for growth of agriculture in India.

Although, the period also marked allegations that such trading in India fuelled speculative activities and was at time instrumental in pushing up prices of essential commodities without actually benefiting the growers, volumes in commodity exchanges grew manifold.

In 2003-04, the total value of commodity futures traded was Rs 1.29 lakh crore. In the year 2004-05, the trade value had reached Rs 5.71 lakh crore, an increase of 342%.

During the financial year 2005-06, the total trade value was of Rs 21.34 lakh crore showing an increase of 274%. The exchanges not only notched up spectacular rise in volumes, but also witnessed phenomenal growth in terms of number of products on offer, participants and spatial distribution.

Interestingly, the jump in commodities futures trading in India came almost entirely by the three national exchanges undermining the role of almost 21 regional bourses.

In 2006-07, the total traded volume in all commodities exchanges was around 36.77 lakh crore of which almost 97.2% was contributed by the three national exchanges. From trading in just seven commodities, the exchanges now offer trading in almost 95 commodities and had more than 3,000 registered members. Daily almost 20,000 registered terminals spread across more than 800 towns and cities are logged on by the traders to trade in the commodity of their choice.

During the decade as the markets grew, the regulator also underwent massive changes. From just being a body to monitor trading in commodities futures in India as envisaged during its inception in 1953, the FMC is now poised to get more teeth after the amendments to the Forward Contract Regulation Act is cleared by the Parliament.

The profile of the commodities traded in the futures exchange also underwent a massive change. From being dominated by agricultural produce like wheat, sugar, edible oils, now more and more participants favoured high-value assets like gold, silver and base metals.

Experts believe that a part of this shift has been the stringent government regulation on agricultural commodities like high margins and open interest and also ban on some of most high volume attracting commodities like wheat and edible oils.

Figures show that in 2006-07 almost 88.7% of the growth in trading volumes was contributed by bullion and metals, while agricultural commodities contributed just around 10.7% of the rise. The futures market growth in the country appears to have bypassed agriculture commodities.

Lately, commodities futures in the country has come under the governments scanner over allegations that such activities fuel inflationary tendencies and encourage speculation in trading of essential agricultural produce. Although the government appointed committee under the chairmanship of planning commission member Abhijit Sen and other independent studies have not found a direct link between price rise and futures trading, the trade continues to be under cloud.

A closer look at the figures of trading value of the national exchanges shows that the most of the trade in commodity exchanges occurs in bullion, metals and energy products. There is a very little growth in futures trading in Agriculture commodities during 2006-07. The growth in agri-commodities was only 10% against 126% in bullion and 2069% in metals. In 2007-08, futures trade in agricultural commodities actually declined. Moreover, only eight commodities contributed 84% value of futures trade in agri-commodities in 2006-07. So the flow of fund to these markets is not excessive for most commodities and, since derivatives are a highly leveraged instrument, are still a small percentage of the traded amount.

As the sun sets on 2008, commodity futures trading in India is placed at an interesting phase. The markets could witness a quantum leap if trading is allowed in wheat, rice and some lentils along with the likely passage of the amendments to FCRA or else the sector would continue to be the whipping boy of policy makers.