According to an Assocham-e-valueserve study, the segment has expanded almost 50 times in a span of five years to Rs 33,75,336 crore in 2007 from Rs 66,530 crore in 2002.
In 2003, the size of commodities trade stood at Rs 1,29,364 crore, registering a hike of over 94 per cent, which further increased by 341 per cent to Rs 5,71,759 crore in 2004. The growth in commodities trade grew, by 276 per cent at Rs 21,55,122 crore in 2005.
However, in 2006, though the commodities trade increased to Rs 27,39,340 crore, it registered a growth of only 27 per cent over the last year.
For 2007, the trade in commodity reached Rs 33,753,36 crore and registered a growth of 23 per cent, the study says.
”The growth in commodities derivatives trading, which was at massive level in the last five years, will now register about 30 per cent growth and reached the projected level of Rs 74,15,613 crore,” said Assocham President Venugopal N Dhoot.
He added that the commodities market size would not grow at its first phase growth rate as it was beginning but people’s participation in the trade would continue and the growth rate is projected at 30 per cent by 2010.
The daily average volume of trade in commodities exchanges by December 2007 was over Rs 12,000 crore, said Mr Dhoot.
Gold, silver and crude recorded the highest turnover at the MCX, while soya oil, guar seed and soyabean soared in NCDEX.
At the NMCE pepper, rubber and raw jute were the most actively traded commodities on an average and this trend is likely to continue, the report says.
The study points out that futures trading in commodities results in transparent and fair price discovery on account of large-scale participation of entities associated with different value chains.
”This reflects upon the views and expectations of a wide section of investors related to that commodity. It provides an effective platform for price-risk management for all segments of players ranging from producers, traders, processors, exporters/importers and the end-users of a commodity,” the study says.
The delivery and settlement procedure differs for each commodity in terms of quality implications, place of delivery, options, penalties and margins, and are defined comprehensively by the exchanges.
Members of an exchange can perform and clear transactions in only those contracts which are exchange specified and approved by the Forward Market Commission (FMC).
Talking about constraints, the study says even as the commodity futures markets remain the strength of an agricultural surplus country like India, the exchanges are still at a nascent stage of development as there are numerous bottlenecks hampering their growth.
The study says the institutional and policy-level issues associated with commodity exchanges have to be addressed by the government in coordination with the FMC in order to take necessary measures to pave the way for a significant expansion and further development of the commodity futures markets. ”Some of the major problems associated with commodity markets in India include infrastructure, trading system, broking community, controlled market, integration of regional and national exchanges as also integration of spot and futures markets,” the study says.
The lack of efficient and sophisticated infrastructural facilities is the major growth inhibitor of the Indian commodity futures markets.
Though some exchanges occupy large premises, they are deficient in terms of the necessary institutional infrastructure, including warehousing facilities, independent and automated clearing houses, transparent trading platforms.
Though the operations of national exchanges are carried out through the electronic trading system, a majority of the regional exchanges continue to trade via the open outcry system. ”In order to attract a greater number of investors towards sector-specific commodities, regional exchanges must introduce the electronic trading system to assure the investors of transparency and fairly priced commodities,” the study says.
Also, despite a large number of members existent in the exchanges’ records, most of them are not involved in trading as the business is not highly profitable in comparison to equities.
Therefore, it is important to absorb a large number of broking firms that have diversified into stock broking and other related businesses.
”To attract active traders to commodity futures, the regulatory authority needs to introduce a more stringent code of conduct in setting standards for brokers, imposing capital adequacy norms, defining qualification criteria, etc,” the study suggests.
Price variability is an essential pre-condition for futures markets. Any deviation in the market mechanism or where the free play of supply and demand forces for commodities does not determine commodity prices will dilute the variability of prices and potential risk.
For a vibrant futures market, it is imperative that commodity pricing must be left to market forces, without monopolistic government control. However, in India, scores of commodities in which futures trading is permitted are still protected under the ECA, 1955.
From a wider standpoint, it is essential to integrate the regional exchanges with the national exchanges to achieve price discovery for regional exchanges to be driven by broad-level prices prevailing at the national exchanges.
Secondly, this integration will facilitate the creation of more efficient markets as price discovery will become dependent on domestic demand and supply of commodities.
The integration of the spot and futures market is another critical factor for the expansion of the commodity futures market in the country as the spot market in commodities is largely controlled by the state governments.
Commodity exchanges play a pivotal role in ensuring stronger growth, transparency and efficiency of the commodity futures markets, Mr Dhoot added.