The Hindu Business Line : Futures ban will have cascading impact: NMCE

Mumbai, May 15 The recent ban on futures trading in four commodities — rubber, chana, soya oil and potato — has come as a bolt from the blue for the industry. Commodity exchanges are already groping in the dark as far as understanding CTT’s potential impact. Though the exchanges hope the trade can absorb the additional burden, the volumes are expected to dip initially. Mr Anil Mishra, Chief Executive Officer, National Multi Commodity Exchange of India Ltd, spoke to Business Line on various issues.

NMCE is among the market leaders in rubber futures trading. What will be the impact of the suspension?

More than the exchange, it will have a cascading impact on a wide cross-section of participants trading on NMCE terminals. The suspension has resulted in the breach of contract between the participating growers’ co-operative societies, who have export commitments; banks as custodians, who have financed against Warehouse Receipts (WRs); nearly 15,000 farmers, small and big; and the exchange as the counterparty.

There is a perception that natural rubber prices are increasing due to futures trade. What is your thought?

The truth is that natural rubber has a direct link with crude oil. The tyre industry uses natural rubber and synthetic rubber in the ratio of 55:45 for manufacturing tyres. Synthetic rubber is made from crude oil. So, when crude oil prices rise, the cost of producing synthetic rubber also goes up. Thus manufacturers shift their demand from synthetic to natural rubber. As the demand for natural rubber jumps, prices move up. Since natural rubber and synthetic rubber substitute each other, natural rubber prices are directly linked with crude oil prices. The sharp rise in crude oil resulted in steep increase in demand for natural rubber. The crude oil prices have risen from a yearly average of $64.20 per barrel in 2007 to $125 per barrel now.

After the ban on four commodities, do you think the government should reconsider or delay CTT?

As per the feedback, CTT is going to hurt the sentiments of the market. Apparently there is something amiss in the perception and calculation of CTT as proposed in the Union Budget for 2008-09. The proposed tax is eight times or 800 per cent higher than the revenue. While the commexes charge Rs 2 on a transaction of Rs 1 lakh (i.e. 0.002 per cent), the government proposed tax of Rs 17 (including Service Tax and Educational Cess) on Rs 1 lakh (i.e.0.017 per cent). It will straightway increase the cost of transaction nine times or by 900 per cent.

Can the markets absorb CTT impact?

No! We believe that CTT is going to reduce the volume of trade and discourage participants.

BSE invested in NMCE recently. Will both cross-sell products such as tapping BSE brokers to take NMCE membership or vice-versa?

BSE and NMCE are strategically looking at a special drive to increase membership. We are arranging special meetings with the brokers. We are hooking on to the IT network of BSE to reach out to over 15,260 terminals, in addition to the existing terminals of NMCE. This would give us an extensive coverage and deeper penetration.