Introduction of commodity market in india

• 1. INTRODUCTION OF COMMODITYMARKET IN INDIA

2. The evolution of the organized futures market in Indiacommenced in 1875 with the setting up of the BombayCotton Trade Association Ltd. Following widespreaddiscontent among leading cotton mill owners andmerchants over the functioning of the Bombay CottonTrade Association, a separate association, Bombay CottonExchange Ltd., was constituted in 1983. Futures trading in oilseeds originated with the setting up ofthe Gujarati Vyapari Mandali in 1900, which carried outfutures trading in ground nuts, castor seeds and cotton.The Calcutta Hessian Exchange Ltd. and the East IndiaJute Association Ltd. were set up in 1919 and 1927respectively for futures trade in raw jute. 3. Futures markets in Bullion began in Mumbai in1920, and later, similar markets were established inRajkot, Jaipur, Jamnagar, Kanpur, Delhi and Calcutta.In due course, several other exchanges wereestablished in the country, facilitating trade in diversecommodities such as pepper, turmeric, potato, sugarand jaggery. The futures trade in spices was first organised by theIndia Pepper and Spices Trade Association (IPSTA) inCochin in 1957. However, in order to monitor the pricemovements of several agricultural and essentialcommodities, futures trade was completely banned bythe government in 1966. Subsequent to the ban of futures trade, many tradersresorted to unofficial and informal trade in futures.However, in Indias liberalization epoch as per the June 4. REGULATING BODY 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 statutoryinstitution set up in 1953 under Forward Contracts(Regulation) Act, 1952. Commission consists of minimum twoand maximum four members appointed by Central Govt. Outof these members there is one nominated chairman. All theexchanges have been set up under overall control of ForwardMarket Commission (FMC) of Government of India. 5. Snapshot of Indian CommodityMarketTwo Major Commodities Exchange in India MCX (Multi Commodity Exchange) NCDEX (National Commodities &Derivatives Exchange 6. MCX (Multi Commodity Exchange) Multi Commodity Exchange of India Ltd (MCX) is astate-of-the-art electronic commodity futures exchange.The demutualised Exchange has permanent recognitionfrom the Government of India to facilitate onlinetrading, and clearing and settlement operations forcommodity futures across the country. MCX offers more than 40 commodities across varioussegments such as bullion, ferrous and non-ferrousmetals, energy, and a number of agri-commodities on itsplatform. The Exchange introduces standardizedcommodity futures contracts on its platform. MCX has been certified to three ISO standardsincluding ISO 9001:2008 Quality Management Systemstandard, ISO 14001:2004 Environmental Management 7. National Commodity and DerivativesExchange National Commodity & Derivatives Exchange Limited(NCDEX) is a professionally managed on-line multicommodity exchange. The shareholders of NCDEXcomprises of large national level institutions, largepublic sector bank and companies. NCDEX is a public limited company incorporated onApril 23, 2003 under the Companies Act, 1956. Itobtained its Certificate for Commencement of Businesson May 9, 2003. It commenced its operations onDecember 15, 2003. NCDEX is regulated by Forward Markets Commission.NCDEX is subjected to various laws of the land like the 8. NCDEX headquarters are located in Mumbai andoffers facilities to its members from the centers locatedthroughout India. The Exchange, as on February 9, 2012 offeredcontracts in 34 commodities - comprising 23agricultural commodities, 6 precious metals, 2energy, 1 polymer and 2 other metals. The top 5commodities, in terms of volume traded at theExchange, were Soya oil, Gaur Seed, Chana, RMseed and Guar gum. NCDEX the countrys second largest commodityderivatives exchange, has been listing contracts since2003. The NCDEX ranked number 32nd in 2010 in theFutures Industry Associations global list of top 53derivatives exchanges measured by volume, rising 9. As of 2011, Indias TOP commodityexchanges are: National Multi-Commodity Exchange (NMCE). Multi Commodity Exchange (MCX). Indian Commodity Exchange ICEX. ACE Derivatives and Commodity Exchange ACE 10. Size of the Market The trading of commodities includes physical trading offood items, Energy and Metals, etc. and trading ofderivatives. In the five years up to 2007, the value of global physicalexports of commodities increased by 17%while thenotional value outstanding of commodity OTCderivatives increased more than 500% and commodityderivative trading on exchanges more than 200%. Agricultural contracts trading grew by 32% in2007,energy 29% and industrial metals by 30%. Precious metals trading grew by 3%, with highervolume in New York being partially offset by decliningvolume in Tokyo. 11. Commodity Markets have their presence in country for over 120 yrs.Trade in commodities has been Unorganized in Regional markets & Local Mandis.Trading in Futures Contracts has been permitted in over 120 commodities.Physical commodity market size in India is estimated to be around 25 lakh core per annum.Majorcommodities traded in India are - Gold, Silver,Crude Oil, Copper, Guar, Chana, Spices, among the few. 12. Ban in forward trading from mid-sixties Prior to ban Thriving commodity exchanges forcotton, gold, edible oils etc. more than 20 regional commodity specificexchanges Recent developments Ban completely lifted in 2003 Emergence of national level de-mutualised onlinemulti-commodity exchanges 3 National and 21 regional exchanges Trade in 60 commodities compared with just 8 in2000 13. Benefits of commodity FutureMarkets. Price Discovery:-Based on inputs regarding specificmarket information, the demand and supplyequilibrium, weather forecasts, expert views andcomments, inflation rates, Government policies, marketdynamics, hopes and fears, buyers and sellers conducttrading at futures exchanges. This transforms in tocontinuous price discovery mechanism. Price Risk Management: - Hedging is the most commonmethod of price risk management. It is strategy of offeringprice risk that is inherent in spot market by taking anequal but opposite position in the futures market. Futuresmarkets are used as a mode by hedgers to protect theirbusiness from adverse price change. This could dent theprofitability of their business. Hedging benefits who areinvolved in trading of commodities like 14. Import- Export competitiveness: - The exporters canhedge their price risk and improve their competitivenessby making use of futures market. A majority of traderswhich are involved in physical trade internationallyintend to buy forwards. The purchases made from thephysical market might expose them to the risk of pricerisk resulting to losses. Benefits for farmers/Agriculturalists: - Priceinstability has a direct bearing on farmers in theabsence of futures market. There would be no need tohave large reserves to cover against unfavorable pricefluctuations. This would reduce the risk premiumsassociated with the marketing or processing marginsenabling more returns on produce. Storing more andbeing more active in the markets. The price informationaccessible to the farmers determines the extent towhich traders/processors increase price to them. Sinceone of the objectives of futures exchange is to make 15. GROWTH IN THE COMMODITY MARKET ASCOMPARED TO THE EQUITY MARKET The Indian commodity futures volumes have grown 5.5 times from Rs.20.53 trillion in 2005-06 to Rs.112.52 trillion in 2010-11 Currently, the average monthly volume on the Indian commodity exchanges is Rs.6 trillion. MCX leads the industry, followed by NCDEX. MCX is not only number one in India but has achieved some global milestones too. It was the largest exchange in silver (in terms of number of futures contracts traded in 2010), number two in gold, copper and natural gas and number three in crude oil. When we say India is the largest exchange in silver, it is a great achievement for the Multi Commodity Exchange. 16. Talking about agricultural commodities, the Indiancommodities market has futures contracts ofcommodities such as black pepper, cuminseed, mentha oil and many more which areinternationally traded but only listed in India;internationally traders tend to consider these asbenchmark rates. Foreign institutional investors, domesticinstitutions, banks and insurance companies are notallowed to trade on the Indian commodity bourses anda majority of volumes come fromjobbers, arbitrageurs, retail traders and small scaleenterprises and corporate (for hedging). Even portfoliomanagement services are not permitted. We expect the Indian commodity futures market toreach at least 15x-20x by FY15. With the contributionof Indian physical commodities to GDP being peggedat 45%, even if the commodity futures market trades 17. List of Traded Commodity Agricultural (Grains, and Food andFiber) Livestock & Meat Energy Precious metals Industrial metals 18. Agricultural Products:- Corn, Oats, RoughRice, Soybeans, Rapeseed, Soybean Meal, SoybeanOil, Wheat, Cocoa, Coffee, Cotton No.2, SugarNo.11,Sugar No.14. Livestock and Meat:- Lean Hogs, Frozen PorkBellies, Live Cattle, Feeder Cattle. Energy:- WTI Crude Oil, Brent Crude, Ethanol, NaturalGas, Heating Oil, Gulf Coast Gasoline, RBOBGasoline, Propane, Uranium. Precious Metal:- Gold, Platinum, Palladium, Silver. Industrial Metals:-Copper, Lead, Zinc, Tin, Aluminum, Aluminumalloy, Nickel, Aluminum alloy, Recycled steel 19. Commodity Exchanges Abuja Securities and Commodities Exchange Bhatinda Om & Oil Exchange Bathinda Brazilian Mercantile and Futures Exchange Chicago Board of Trade Chicago Mercantile Exchange Commodity Exchange Bratislava, JSC Dalian Commodity Exchange Dubai Mercantile Exchange Euro next life Intercontinental Exchange 20. Minneapolis Grain Exchange Multi Commodity Exchange National Commodity and Derivatives Exchange National Multi-Commodity Exchange of India Ltd National Food Exchange New York Mercantile Exchange New York Board of Trade Rosario Board of Trade Steelbay Kansas City Board of Trad London Metal Exchange Winnipeg Commodity Exchange National Spot Exchange 21. Recent trends in CommodityMarket. The 2008 global boom in commodity prices - foreverything from coal to corn was fueled by heateddemand from the likes of China and India. Speculation in forward markets. Farmers are expected to face a sharp drop in cropprices as a result of bad rainfall. Other commodities, such as steel, are also expected tofall due to lower demand 22. Future Contract Commodity and Futures contracts are similar as"Forward" Contracts. Early days "future" contracts (agreements to buynow, pay and deliver later) were used as a way ofgetting products from producer to the consumer. These typically were only for food and agriculturalProducts. Now it is used for every metal. Future contract for commodity trading and for sharetrading is all different from one another 23. CONCLUSION India is one of the top producers of a large number ofcommodities, and also has a long history of trading incommodities and related derivatives. The commoditiesderivatives market has seen ups and downs, but seemto have finally arrived now. The market has made enormous progress in terms oftechnology, transparency and the trading activity.Interestingly, this has happened only after theGovernment protection was removed from a number ofcommodities, and market forces were allowed to playtheir role. This should act as a major lesson for the policy makersin developing countries, that pricing and price riskmanagement should be left to the market forces rather 24. THANK YOU.Bibliography: Google. For Images MCX & NCDEX official websites Indian Blogger:- MANGAK KESHAV. Nirmal Bang, Marketoperation.com