The Hindu Business Line : A reliable investment tool in an emerging market

THE GLITTER CONTINUES: Gold has been witnessing a good time during the last two years, both in the spot and futures markets. No wonder, the yellow metal has been one of the actively traded commodities in the futures exchanges in the country. — Mahesh Harilal

THE dollar is falling, inflation is rising, crude oil is flaring up and total nervousness is gripping the stock market. But somewhere in some corner of the country, there is one thing that is booming. It is the exchange-traded commodity futures.

From a humble start during 1997-98, when the Union Government permitted the East India Cotton Association to start forward contracts in cotton, commodity futures trading has come a long way.

Today, forward contract exists in nearly 100 commodities that are traded in 25 exchanges across the country. And the turnover of the commodity exchanges is zooming.

During 2001-02, the turnover was Rs 35,000 crore. It almost trebled to Rs 1 lakh crore the next year. The total turnover of the commodity exchanges in 2004-05 is projected to have touched Rs 5 lakh crore, according to Mr S. Sundaresan, Chairman, Forward Markets Commission (FMC).

Commodity derivatives are not exactly new to India, according to Mr Rajesh Chakrabarti of the College of Management, Georgia Tech. In a recent research paper on "Commodity Futures in India", he says: "The idea of trading futures may be traced to forward contracts as far back to around 2000 B.C. in China."

"Forward trading in commodities existed in India from ancient times (it is mentioned in Kautilya's Arthashastra) and the first modern futures market was established in 1875 for cotton contracts by the Bombay Cotton Trade Association, just a decade after the Chicago Board of Trade (CBOT) traded its first future," he says in the paper.

Experts feel the turnover of the commodity futures market will overtake that of the capital market in the near future.

Interest in commodity futures has increased so much in recent times that banks have begun to play a prominent role in the futures exchanges. For example, HDFC Bank recently picked up five per cent stake in Multi Commodity Exchange of India. On the other hand, ICICI Bank is part and parcel of the National Commodities and Derivatives Exchange of India.

LACKING PRICE DISCOVERY: A farmer leaning on a truckload of potatoes at Jalandhar's wholesale mandi, one of the largest in the country. For the last couple of years, farmers have been getting prices in the Rs 2-2.50 a kg range for potato, making it less remunerative to grow the horticultural crop. With potato production likely to exceed 25 million tonnes this year, forward contracts could have been a solution for the growers to discover better prices.— Kamal Narang

Organisations such as Food Corporation of India, LIC and Central Warehousing Corporation are all now part of one or the other futures exchanges in the country.

So many developments have taken place that the Government now plans to introduce turnover tax for the transactions in futures exchanges. But the Government is also thinking in terms of making warehouse receipts an instrument on which banks could lend money to growers.

With the market expanding fast and thick, there is a need for better monitoring and supervision of the players. Therefore, the Union Government plans to arm the FMC with more powers to protect the interest of all participants.

Currently, a bill to amend the 1952 Forward Contracts (Regulation) Act is pending in Parliament.

The draft aims at defining commodity derivatives and futures contracts to provide for regulation and FMC will control futures in all goods. It also paves way for the Government to cease having control on any commodity.

The much-awaited option would also become a reality once the Bill is passed and provisions also exist for setting up an appellate tribunal on the lines of securities appellate tribunals.

While the safeguards are being put in place, the commodities are finding their price levels at the exchange. For example, a record mustard/rapeseed crop projection found its echo in the futures exchange when the prices slid below the minimum support price of Rs 1,700 a quintal.

Likewise, crude, gold and silver prices are keeping pace with the movement in the global markets. The exchanges have also gone in for tie-ups with bourses in Japan, New York and other countries to help market players share their experiences with one another.The commodity futures have begun to develop as a reliable tool of price discovery, hedging and investment.

Though not many corporate houses have shown interest, maybe, sooner or later, they could find uses for these exchange-traded commodities.

It is in this context that a two-day meeting on exchange-traded commodities is taking place in Mumbai from April 15.

The meet will see experts sharing their outlook on grains and pulses, edible oils and oilseeds, bullion and cash crops such as guarseed, castorseed, pepper, cotton and sugar.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
A reliable investment tool in an emerging market

Rationalisation of freight classification — Southern flour mills feel the heat

TNT Express begins `Mango Bytes' service

End to Monsanto's Bt cotton monopoly?

VAT confusion strikes coconut oil prices

TN, APEDA pact to set up cashew export zone

Tata Coffee plans to set up facility in Uganda

ICICI Lombard, Maharashtra Govt pact to insure farmers