Earlier, the commodity trading activities in the Indian commodity market were conducted in an unorganised format in rural areas, haat, fairs etc. With developmental and technological advancements, the organised markets with regulations and guidelines came into existence. In 1875, the Bombay Cotton Trade Association was founded as the first commodity exchange in the Indian commodity market.
Post-independence, several commodity exchanges were established. The commodity exchanges started to become a central body for investors interested in commodity trading. Today, commodities such as agricultural products, energy products, base metals and bullion products are available for investors interested in trading in the Indian commodity market.
Structure of the Indian Commodity Market
(Image Source: Functions and Structure of Commodity Futures Market: An Indian Perspective Dr. K. Prabhakar Rajkumar1 & M. Thilaga 2 http://www.ijrras.com/v3_i12/Paper%2019.pdf)
The Indian commodity market follows a 3-tier structure for commodity trading with the Forward Market Commission acting as an intermediary regulatory body between the government and the commodity exchanges.
MCX and NCDEX are the leading national-level commodity exchanges in India today. There are a number of regional commodity exchanges dealing in specific commodities spread across India.
In 2003, Forward Market Commission (FMC) was formed for regulating the commodity exchanges in the Indian commodity market. In 2015, FMC was merged with the Securities and Exchange Board of India (SEBI). Building a stronger regulatory system was the aim of the merger. The regulatory system remains stringent with regulatory guidelines and frameworks for transparency of deliveries and to ensure that malpractices are kept at bay in the market.
Key Terms used in the Commodity Market
A buyer and seller trade physical commodities directly in a spot market. Generally, spot markets come under unorganised commodity trading markets. The delivery of goods is immediate and through cash transactions. The local mandi, retail market, wholesale market for Business-to-Business (B2B) trading and similar set-ups belong to the spot market category.
Derivatives Markets utilises financial instruments such as futures, options and swaps for trading commodities through commodity exchanges.
It is a contract that records a pre-determined purchase or sale of a specific quantity of goods at a future date at a specific price.
Overview of two major commodity exchanges in the Indian Commodity Market
Established in 2003, Multi Commodity Exchange of India (MCX) facilitates commodity trading across various segments. It is the first listed exchange of India. MCX is the leading national commodity exchange with its presence in over 1200 towns and cities around the country.
By adapting to latest technologies and through alliances with international exchanges, MCX has grown into a dominant player in the Indian commodity market. As per the MCX website, in terms of value of commodity futures contracts traded in the first quarter of 2017-18, MCX enjoys a market share of 89.93 percent.
National Commodity and Derivatives Exchange Limited (NCDEX) was founded in 2003. It is a public listed company with leading public sectors banks and companies as shareholders/promoters. Based on the records given on the NCDEX website, the exchange provided trading of 25 commodity contracts across segments as of 31 March 2017. Out of the 25 commodity contracts, 22 were agricultural contracts.
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Understanding the commodities value chain
For years, agriculture has been a major contributor to India’s economic growth. Trading of agricultural commodities such as sugar, soybean, maize, wheat, chilli etc. has been going on for centuries in the spot markets. In the last few decades, due to economic reforms and modern innovations, a number of organised commodity trading exchanges were established in India and around the world.
Farmers are key players in the value chain of producing agricultural commodities. The regulated Indian commodity market gives them the benefit of gaining more value from their harvest. Also, enhancing the quality of produce gives farmers a better opportunity to gain higher price from traders. The farmer education initiatives by NCDEX and other national-level organisations are training the farmers to produce quality products with higher grades so that they can negotiate better rates from the traders.
Non-agricultural commodities such as gold, silver, steel, copper etc. can also be traded in the Indian commodity market. Investors in the Indian commodity market purchase or sell commodities to earn profits from the price advantage gained in the future. In reality, most investors do not buy the physical commodities as they are not interested in buying the underlying commodities. These investors just purchase the futures contracts.
Developments in the Indian Commodity Market
Earlier, cash settlements were more common in commodity trading. With the growth of online trading platforms, today commodity trading can be easily managed by investors on the move with the help of a bank account, demat account and trading account.
Leading financial service providers and banks are offering commodity trading services by taking membership in the commodity exchanges that serve the Indian commodity market. Today, the Indian commodity market deals with trading turnover that comes up to trillions of rupees.
Some factors that affect the commodity market
· Due to unfavorable weather conditions or natural calamities, if the harvest of crops is affected then the price of those crops will be affected in the Indian commodity market.
· Changes in government policies can lead to price volatility in the commodity market.
· Increase or decrease in the demand and supply of commodities can have an impact on their pricing.
· Changes in the global markets for primary and secondary goods can affect the price of commodities such as fuel, gold, etc.
With changing times, the Indian commodity market has grown into a well-managed market with online trading facilities and modern tools to ease the trading activities for investors. With standardized regulatory frameworks and best practices, the Indian commodity market has gained the attention of investors wishing to venture into new investment markets.
Trading of futures contracts are currently offered by leading commodity trading exchanges in India. With SEBI trying to build a robust regulatory system for the benefit of all stakeholders, options trading can be next big step in the growth of the Indian commodities market.
The Indian commodity market holds promise for investors interested in diversifying their investment portfolio in a growing economy like India. To learn more about investing in commodity derivatives, visit https://www.tradebulls.in/commodity-derivatives
Post your questions related to Commodity Derivatives in the comments section.