The Indian Markets have recently thrown open a new avenue for retail investors and traders to participate in commodity derivates. For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities become a good investment option.
A new entrant into the field of Commodity Trading needs to have a valuable insight on the know how for trading in the Indian commodities market. On a wider landscape one needs to understand the policy initiatives taken, regulatory frame work, regional & national exchanges etc. – this indeed indicates that the Indian markets have become in sync with the global markets. India is an agricultural based economy and hence the consumption pattern of the Indian markets indicates a huge turnover in agro-commodities, which is a major contributor to the GDP & National Income.
· Commodity Trading: May be defined as a process through which a physical substance such as food grains or metals which are interchangeable with another product of a similar type, which an investor buys or sells usually through a futures contract, the price of the commodity in question being subject to supply and demand.
· In order to facilitate commodity trading, the Govt. in India initiated a few policies which embarked upon a nation-wide multi-commodity exchange, expansion of permitted list of commodities under the forward contracts act & many more…To elaborate, nation-wide multi-commodity exchange would essentially make the availability of the futures contract in the most cost effective price, also futures market would improve the price risk management systems & maintain the financial integrity of the economy. With the setting up of three Multi Commodity Exchanges, retail investors can now trade in Commodity Futures without having to take delivery of physical stocks.
· In fact to understand better, forward contracting necessarily facilitates to manage the supply – demand risk, further, forward contract gives rise to price discovery & price risk …this is where furthers contract come in picture. We can say that Forward & Futures compliment each other. Essentially trading in futures options is banned by the FMC / Govt. of India, but this will be discouraged once the price discovery & risk management will be in place (i.e. it will happen with the increase in the list of commodities traded).
· Trends indicate a surge in the trade volumes – which essentially depicts a remarkable performance of the industry, which is being revived. The year 2007-08 shows an average trade volume of Rs.1, 40,000 Cr. (Inc. MCX & NCDEX) Of the country’s GDP of Rs.13, 20,720 Crores, Commodities related businesses constitute about 58%.. The turnover of the Indian Commodity exchanges led by this Multi Commodity Exchange of India Ltd. is slated to achieve Rs. 50 Trillion by the next financial year.
· Having given the mandate (by Govt. of India) to 4 entities namely: MCX, NCDEX, NMCE, and MMTC to set up national commodity exchange, the government is willing to set the platform for trade nationally rather than regionally for all commodities.
· These 4 entities would not essentially be a threat to the regional commodity exchange specifically because of the following reasons:
1. Commodity exchanges are trading in futures contract on those commodities, which have some regional relevance. It is not going to be as easy as a share of a company to get listed in a different exchange.
2. Delivery of commodity is a physical activity; delivery of shares is an electronic activity
3. Commodity exchange members are stakeholders in those commodities where in stock exchange members were never the owners of the stock to control where the stock should get traded.
4. Importance of commodity exchanges are linked to the stakeholders of that particular commodity wherein the success of a stock exchange is more on transparency and low transaction cost.
· Understanding the regulatory frame work, FMC faces the highest challenge with the onset of national exchange & electronic trading. A national exchange in commodities would give rise to commercial pressures from participants in terms of trade practices followed by exchanges, regulatory measures by the regulator and exchange and arbitrational aspects pertinent to difference in governing laws among the states. FMC and the exchange are required to be well equipped with such challenges in the shortest possible time.
· India’s & the WTO: India being a signatory of the WTO & a major consumption market could extend an invitation to the rest of the world to explore the Indian market; this in turn will simultaneously create an opportunity for the Indian producers & traders to explore the global market. What could be underlined for India would be price risk management & quality consciousness - which will act as the determinant for success.
· India could witness an increased international participation in trading activities and investments once the national exchanges become fully operational. A greater convergence of markets – equity, commodities, forex, and debt could enhance the businesses with diversified portfolios. Such integration would create specialized treasuries and fund houses that would offer a gamut of services to provide comprehensive risk management solutions to India’s corporate & trade community.
· Price fluctuations in commodities futures markets have been observed to be less volatile when compared to the equities or bond markets thus providing an efficient portfolio diversification option.
· Commodities offer an immense potential to become a separate asset class for the market savvy investor and speculator.
Abhijit Maitra
http://www.sharetipsonline.com
(शेर मार्केट टीप्स के लीये देखीये)
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