S. Sundaresan

The Commodity Futures Market in India has witnessed unprecedented growth in the last two years. The market grew by an astounding 440 per cent during 2004-2005 and the total value of trade on March 31 was Rs. 5.71 lakh crore. The momentum has been maintained during 2005-06, with the total value of trade in the three national and 21 regional exchanges during April-January of the current fiscal touching Rs 16 lakh crore.

This figure is expected to cross Rs 18 lakh crore by the end of March with daily volumes of trade reaching Rs 10,000 crore.

The exchanges are at present trading in about 90 commodities with participation from members spread all over the country. There is trade in bullion, metals, foodgrains including pulses, fibres, spices and crude oil. This takes place in the three national exchanges viz NCDEX, MCX and NMCE and 21 regional exchanges spread all over the country.

Important functions

The commodity futures markets primarily perform the two important functions of price discovery and price risk management. They help the farmers, producers, exporters, importers; for the consumers, in the long run the markets could provide price stability. At present, participants include approximately a thousand members of the commodity futures exchanges and thousands of their clients.

FMC, as the regulator of commodity futures markets, is concerned about protection of investor interest as well as orderly growth of commodity markets. It has provided all members with unique membership codes, which is a pre-requisite for trading in the commodity exchanges.

To facilitate increased investment in commodity futures markets, the FMC has advocated the participation of mutual funds, FIIs and banks in futures trading, and the proposal is under the active consideration of the Union Government. Amendments to the Forwards Contract (Regulation) Act are on the anvil and, thereafter, the FMC would have functional and financial autonomy to regulate the market even more effectively.

Pre-requisite

While the commodity futures markets are safe and the investors are well protected, the study of the market is a pre-requisite before the investment.

There are differences between the security market and the commodity market; in the latter the delivery mechanism is an essential feature and quality concerns and warehousing aspects have to be understood before participating.

Volatility in the market affects important segments of the economy with contradictory interests like the producer and the consumer. The small investor must acquire some domain knowledge before participating in the futures of specific commodities.

With a positive policy and regulatory framework in place and also, sound economic fundamentals the commodity futures market in India can only grow further in the coming years.

(The author is Chairman, Forward Markets Commission)

(This article was published in the Business Line print edition dated February 27, 2006)
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