The Hindu Business Line : `Uncertain Govt policies hamper investor interest in futures'

Mumbai March 30 A combination of uncertain Government policies, volatility, high level of speculation, heavy losses incurred by retail investors and shallow market with no participations from mutual funds and institutional investors are hampering the growth of commodity futures, according to market participants. Volatility alone appears to have led many investors away to the equity markets and mutual funds.

Switching over

Says Mr V. Ganapathy, an investor in commodity futures for the last two years: "On many occasions prices move up or down with no fundamentals. I have cut down my investment in commodities and moved over to equities and mutual funds."

Agrees Mr Chintan Modi, Vice-President, India Infoline Commodities Pvt Ltd. "Retail investors start with bullion futures and move to agri futures without understanding market fundamentals. The problem arises when they do not exit their positions in time and end up taking delivery of steel ingots and kapas. Volatility still remains a worrying factor. Recently, mentha futures moved up and down by 11 per cent in a single day."

Fluctuating prices, however, seem to have little impact on wholesalers. "I don't look at commodity futures for returns, but I do make profit. I trade only in pulses and don't mind taking or giving deliveries," said Mr Vinay Kadam, a stockist in Vashi (Mumbai).

FALL IN TURNOVER

The phenomenal growth in turnover registered by commodity futures exchanges over the last three years may be petering out, looking at the trading volumes in the current fiscal. After 2002, volumes expanded exponentially. In fiscal 2005-06, the aggregate turnover expanded by 274 per cent to Rs 21.34 lakh crore. What has gone wrong? Admittedly, a major reason for the high growth logged during the previous years was the small base at the beginning.

"We don't foresee a major jump in commodity trading volumes in the coming years. Though new retail investors are taking interest, over 90 per cent of them end up losing money due to rampant speculations and lack of knowledge," said Mr Modi.

Concurs Mr Mohan Natarajan, Director, Kotak Commodities: "It is going to be a year of consolidation with many illiquid contracts phased out. Small broking firms and participants focusing on single commodities will move out, thus hampering growth in volumes in FY08".

From Rs 5.71 lakh crore in 2004-05, commodity futures' turnover jumped to Rs 21.34 lakh crore the following year.

DAMOCLES SWORD

However, in the current fiscal year (up to March 15, 2007), the growth rate has considerably slowed down to 64 per cent to Rs 35.08 lakh crore.

"The Government should make its stand clear. If it wants to ban futures trading in essential commodities it should implement it immediately. Traders can't afford to have a sword hanging over their head," says Mr Atul Shah, head of research, Emkay Commodities Ltd.

Market participants are also not convinced with the Government intention to deepen the market by allowing mutual funds and financial institutions' participation in commodity trading.

"It is very unlikely that the government will allow mutual funds and financial institutions in commodity market next financial year. However, the Bill to amend the Forward Contract (Regulation) Act to give more operational powers to the market regulator, the Forward Markets Commission, may be passed," said Mr Natarajan.

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