Metals and energy continue to be in focus in the commodity domain. Most analysts cite the reason for this as the escape route taken by investors to steer clear of politically-sensitive, intervention-laden agri-commodities. The Multi Commodity Exchange of India, which focuses on metals and energy, has seen a 26% rise in turnover in April-November 2007, accounting for 75% of the total trade on the country?s 24 commodity bourses.
The combined turnover of all commodity bourses during the period was down 2% to Rs 24.38 lakh crore, according to data from commodity market regulator Forward Markets Commission. Also, actions in the international markets in metals have been reflecting in India. They have more prominent fundamentals. People are more convinced about price trend and behaviour in metals and energy. If someone gets greater returns in metals and energy with the same investment why will he invest in agri-commodities?
Analysts believe the bull-run in these commodities will extend into 2008, attracting more Indian investors, while policy restrictions may stymie growth in agri-commodities.
The rise of MCX comes at a time when turnover in the other two national bourses focusing on agri-commodities – National Commodity and Derivatives Exchange and National Multi-Commodity Exchange – is down more than 40% and 70% respectively.
Factors like the ban on politically-sensitive commodities, higher initial trading margins, lower position limits and lack of reforms have led to the sharp fall in agri-commodities trade. India banned trading in wheat, rice, urad and tur in early 2007 on inflationary concerns – a move that saw trading volumes fall steeply on fears of similar curbs on other commodities. Investors preferred energy and metals, which have an initial margin of 4-6%, against agri-commodities where margins may be as high as 20%.
What to expect
Talks are rife in the industry that a fourth commodity exchange is needed. It is necessary to overcome many functional inadequacies of the existing online exchanges, particularly as mechanisms of efficient price discovery. A fourth commodity exchange is becoming increasingly necessary to overcome many functional inadequacies of the existing three national online commodity exchanges, particularly with respect to delivery-based settlement as a mechanism of efficient price discovery.
India?s geographic placement in the time zone between East and West provides a large arbitrage opportunity, which has not been tapped to its true potential. Another commodity exchange may help using these opportunities better, thereby improving trading volumes of India-specific contracts. And to be precise, a fourth commodity exchange is bound to attract more participants.