The Hindu Business Line : Commodity trading set to regain lost glory

FOR long Mumbai has been known as the Mecca of stock market players. For several decades, the Bombay Stock Exchange and in recent years, the National Stock Exchange have been hives of hectic trading activity in equities.

One more dimension is now being added to the commercial capital of the country. Mumbai is rapidly becoming the epicentre of commodity trading. It is not surprising given the history of the city and the entrepreneurial capabilities of its ingenious citizens.

The equity cult was in a sense kick-started by major Mumbai-based corporates like Reliance Industries Ltd way ago in the early 1980s. It took about two decades for the stock market to attain a level of maturity.

Although buy-sell transactions can now be put through from anywhere in the country with the introduction of screen-based trading, Mumbai is still the place from where largest volumes of trades in stocks and shares materialise.

It would be interesting to recall that many players in today's stock market have their roots in commodity trading. They were forced to abandon their traditional commodity business and migrate to equities trading after the Government imposed numerous restrictions on commodity trading in the 1960s.

With the opening up of the economy and recognition of futures trading as a legitimate tool for price risk management, commodity trading is once again set to regain its lost glory. Players in the equity market have begun to take up membership of the commodity exchanges and are beginning to trade commodities.

Commodity trading is emerging as the big opportunity in the commercial capital of the country. With two nation-wide modern multi-commodity futures exchanges — National Commodities and Derivatives Exchange (NCDEX) and the Multi Commodity Exchange (MCX) — headquartered in Mumbai, commodity trading is set to receive a big boost.

If it took two decades for the stock market to reach a modest level of depth and liquidity, commodity futures markets are poised to reach a critical mass in less than half a decade.

In developed countries, commodity futures markets are often bigger than equity markets. In India, futures trading in commodities is at a nascent stage because the market had been opened up only recently.

The potential of the commodities market is simply mind-boggling. The current value of the physical market for major commodities — agricultural and non-agricultural — is estimated at around Rs 5,00,000 crore. Futures trading would typically be five to six times the size of the physical market. Obviously, there is tremendous scope for the participation of a large number of players to benefit from the huge growth opportunity commodity futures trading is offering.

Stockbrokers are in a position to take advantage of the emerging scenario because of their expertise in securities intermediation, understanding of established clearing and settlement systems and of course financial capability. They need to acquire product and market knowledge.

While it is heartening that both NCEDX and MCX are making a thoroughly professional approach to boosting commodities futures trading, it is a matter of regret that two of the country's oldest commodity futures exchanges based in the city — Bombay Oilseeds and Oils Exchange and the East India Cotton Association — seem to be fading away.