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Suresh P. Iyengar

High volatility results in investors incurring losses

Mumbai , Nov. 24

The businesses on the national commodity exchanges are witnessing a declining trend amidst rising commodity prices.

The aggregate turnover on NCDEX plunged fromRs 1,17,47,142 crore in September to Rs 94,12,513 crore in October.

Similarly, the turnover on MCX fell from Rs 1,90,128 crore in September to Rs 1,76,185.2 crore in October.

Reasons

One of the major reasons for declining trading volumes could be due to losses incurred by investors in the last several months because of high volatility.

In addition, new market participants have turned rather wary of entering this market without gaining adequate knowledge of the market and products.

The futures market regulator - Forward Markets Commission (FMC) - has played a key part in the slowdown by tightening regulatory oversight through higher margins, penalties and so on. Systemic risks - bad and / or delayed deliveries - too have scared participants away.

Open interest cut

"The regulator has cut open interest position on many commodities forcing many investors to liquidate their positions to meet the norms. The imposition of additional margins on volatile commodities has also scared away many small investors," said Mr Sanjay Mehta, a trader on MCX.

FMC recently imposed stiff penalty on market participants who breached the open interest limits and empowered the exchanges to deduct gains accumulated by errant members breaking the open interest limits.

Quality concerns

"Apart from the restrictions imposed by FMC, there were also concerns over quality of commodities delivered on the exchanges. The decrease in price movements of the international products such as crude, gold and other metals in global markets has narrowed down opportunities for the investors," said Mr Sushil Sinha, Regional Head, Karvy Commodities.

In fact, commodity futures exchanges are under pressure from June ever since prices of wheat and pulses hit the roof.

Speculation

The rising prices attracted hoards of speculators vying to make quick bucks.

Politicians also raised questions over co-relation between rising commodity prices and futures trading.

Mr V. Shunmugam, Chief Economist of MCX, said: "One of the main reasons for decline in turnover can be attributed to fall in trading interest due to less volatility in prices. In the last two months, the prices on the futures market remained more or less stable as there was less price movements on the spot markets because of supply constrains".

Essential commodities

Sensitive essential commodities of daily consumption — led by urad, chana, tur and wheat — suffered the biggest drop in turnover. Imposition of storage limits under the Essential Commodities Act in States such as Maharashtra and Delhi added to the uncertainty.

From January till October, turnover of urad on NCDEX plunged over 96 per cent as the prices in the spot market zoomed to historic highs due to crop failure. Similarly, wheat turnover fell 76 per cent due to perceived political risk of high prices following a shortfall in production forcing the Government to resort to imports after 14 years. Sugar (-91 per cent), tur (-83 per cent) and gur (-77 per cent) were also reeling under various restriction imposed by the market regulator.

Copper was the sole exception with its turnover rising by over 1,200 per cent in November to Rs 126.33 crore from Rs 9.22 crore in January.

Metals

Among metals, silver registered the steepest fall of 71 per cent while gold fell 30 per cent.

Though the prices of precious metals picked during the early part of the calendar year it went down on sharp correction.

The decline in crude prices had a major impact on gold prices. Steel and zinc, which fell 56 per cent and 85 per cent, due to demand-supply mismatch.

The market mayhem of May when commodity prices crashed seems to be still fresh in some peoples' minds.

More Stories on : Commodity Markets | Commodity Exchanges

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