Turnover plunges 70% in first fortnight of this fiscal; CTT, NSEL effects continue to haunt

The commodities futures market continues to reel under the twin impact of the commodities transaction tax (CTT) and the National Spot Exchange Ltd (NSEL) imbroglio. These developments, which have affected liquidity and discouraged trading, have led to a sharp dip in turnover in the market.

In the first fortnight of this month, the turnover dropped by 70 per cent to ₹2.36-lakh crore from ₹7.87-lakh crore in the corresponding year-ago period.

“Interest in commodities trading has been on a downswing ever since the CTT was imposed in July last year. The immediate effect was the trade turnover falling 40 per cent,” said an analyst.

Sliding turnover

Trade turnover during July 1-15, 2013-14 dropped to ₹4.08-lakh crore from ₹7.87-lakh crore in the first fortnight of that fiscal.

During 2013-14, the trading in commodity futures plunged to ₹101-lakh crore from a record ₹170-lakh crore in 2012-13.

The numbers relate to the six national commodity exchanges (MCX, NCDEX, MNCE, ICE, ACE and USEL) and 10 regional exchanges.

The Centre imposed a 0.01 per cent CTT from July 1, 2013 on all non-agricultural commodities such as gold, silver and metals. The CTT for a trade worth ₹1 lakh is ₹10.

350% expensive

Traders feel that the CTT has made exchanges 350 per cent more expensive. “Imposition of CTT has increased the cost of hedging and trading. Because of the high cost on commodity exchanges, small and mid-size traders are shifting to illegal (dabba) trading,” said Sandeep Jain, Director of Tradeswift Commodities.

“The NSEL imbroglio in August further brought down the turnover by another 10 per cent. It has shrunk the money available in the commodities market. Besides, the imposition of additional margins by the Forward Markets Commission, which regulates commodity trading, on various products also affected trading,” said the analyst.

Naveen Mathur, Associate Director (Commodities and Currencies) at Angel Commodities Broking, said that apart from the CTT, the NSEL episode sapped investor confidence. “Besides, the past few months we have witnessed low volatility in some of the major commodities. This, along with equity markets touching new highs, has resulted in commodities trading taking a hit,” he said.

Shift to equity

There has been a shift towards the equity market as the Sensex rises with each passing day, said a trader. The Sensex had surged to record 22,939.31 last week before retreating to 22,631 on Monday.

Genuine physical market hedgers and international reference jobbers are also missing from the commodities exchanges. “Only small-time jobbers and traders are left, and this particular category of participants needs volatility to trade, which has been missing for quite some time,” he said. Commodities trading saw some improvement during January-March after the additional margins were removed.

Besides, the Forward Markets Commission permitted high-frequency trading in mini- and micro-contracts from January. “These improved trading before the interest waned in the first fortnight of April,” said the analyst. During January 16-31, trading on the commodities exchanges increased to ₹3.74-lakh crore from ₹2.77-lakh crore during December 16-31. In the first fortnight of March, the turnover was ₹3.43-lakh crore.

Poll effect

Elections and non-participation of industrial hedgers, too, are affecting commodity trading. Also, prices of key commodities such as gold, crude oil, and metals are ruling flat, leading to lack of interest among the trading community.

According to Vandana Bharti, Assistant Vice-President (Commodities) at SMC Global Securities, “If a stable government is elected, then we may see some increase in the prices of base metals and energy products. The bullion counter may see some decline as the haven appeal will decline. Further, if the newly-elected government goes for an import duty cut, then we may see a further decline in bullion prices.”

(This article was published on April 28, 2014)
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