MUMBAI - India's commodity exchange
markets, where trading volume has ballooned
50-fold in barely five years, could shrug off a
recent drop in business and almost double in size
within the next two years, according to a report.
The market, which has grown to US$858
billion in 2007 from $16.9 billion in 2002, could
expand to $1.8 trillion by 2010, the Associated
Chambers of Commerce and Industry of India and
market researcher Evalueserve say in the January
20 report. Commodity exchanges let traders take
direct possession of commodities or exchange
contracts for future delivery with related
activities in derivatives similar to stock
markets.
The country last week became the
first in Asia to offer trading in
carbon credits - an exchange
of cash for costs saved from using
environmentally-friendly practices and products.
The innovation by Multi Commodity Exchange of
India Ltd (MCX), one of the country's three
leading exchanges, puts it in an elite group along
with the Chicago Climate Exchange and the European
Climate Exchange.
As an agriculture-based
economy, India has had commodities trading
exchanges dating to the Bombay Cotton Trade
Association Ltd, established in 1875. Three large
exchanges - MCX, the National Commodity and
Derivative Exchange (NCDEX) in Mumbai, and
Ahmedabad-based National Multi Commodity Exchange
of India - now lead a sector revival after a ban
on futures trading in most commodities was lifted
in 2003. The big three are joined by more than 20
smaller exchanges - compared with about 300 before
World War ll - that operate around the country
trading in about 100 commodities.
"Earlier, we had small regional exchanges
for commodity trading, but with the setting up of
three online national exchanges, the commodity
market was made open to the whole country," said
Prabhakar Patil, a director of the regulator, the
Forward Markets Commission (FMC). "We have seen an
80-90% increase in trading volumes since 2003."
More than agricultural goods such as
grains, cotton, coffee and spices are traded.
Precious and non-precious metals such as gold and
ores and energy products such as coal and oil also
attract commodity exchange business. NCDEX at
present facilitates trading in 57 commodities and
has pledged to expand the range. That goal is
expected to be eased as the markets push for less
red tape and try to reduce government concerns
that block foreign direct investment in commodity
exchanges.
Foreign companies are at
present permitted only as shareholders in
commodity exchanges - Goldman Sachs and European
energy trading major Intercontinental Exchange are
invested in NCDEX and Merrill Lynch in MCX. More
foreign participation will be gradually allowed,
starting with non-agricultural products, according
to the FMC.
The government this week
granted the FMC more autonomy, similar to that
enjoyed by the stock exchange regulator, the
Securities and Exchange Board of India. Among
other benefits, that will allow the FMC to take
punitive action against illegal trading.
Expansion of its power comes as the
government has come under attack for its handling
of the market with policies such as ad hoc pricing
and limiting trading volumes in essential
commodities.
Business World, a leading
business weekly, reported a 60% drop in trading
volumes in the last fiscal year that it linked to
the government's policies. The FMC, dismissing the
figures, said trading volumes fell only 0.8% in
the period.
The government in January
banned trading in the major commodities of
urad (a type of bean), tur (a pea
and like urad an ubiquitous element of
Indian cooking), rice and wheat, fearing that
speculative trading contributed to food-price
inflation of more than 11%.
Commodity
trading experts reject any such linkage, pointing
out that India has strict upper limits in
commodities trading, such as allowing trading of
only 15,000 tonnes of urad and tur,
or 1.5% and 0.6% of annual production.
India produces 28 million tonnes of sugar,
yet the government imposes a ceiling of 10,000
tonnes per trader, which critics say limits
hedging, affecting both farmer and consumer by
preventing better prices to be obtained amid
fluctuations in demand and supply.
"We
wanted to keep a narrow band since the number of
participants are small," said Patil of the FMC.
"Once we have more trading participants we will
gradually increase the ceiling."
The FMC,
meanwhile, recognizing the benefits efficient
exchanges can bring to producers, this week
decided to install ticker boards for commodity
prices in regional languages in various local
markets, to help farmers get better value for
their products. FMC chairman B C Khatua has also
suggested establishing an integrated nationwide
market for uniform pricing.
The
government, for its part, is removing a ban on
futures trading in some commodities, including
rice and wheat. Futures trading, which allows a
commodity to be bought for delivery at an agreed
price at a specified future date, can guard
parties involved in the supply chain against
fluctuating market price risks.
The
regulator may face a slower response to some other
requests. This month, it asked commodity exchanges
to make life easier for investors by permitting
trading outside the electronic banking format. The
government is expected to move warily on this as
the present investing environment is so
speculative that any volatile influence in prices
of food grains could have serious political
implications for a government keen to demonstrate
support for the country's farmers and the less
well-off.
The government on January 22
announced key initiatives to boost India's
commodity markets at a conference involving
industry body Assocham and the FMC.
The
union minister for food processing industries,
Subodh Kant Sahai, said the Banking Regulation Act
of 1949 is being amended to allow financial
institutions and mutual funds to trade in
commodities futures. The government is also
considering allowing 100% foreign direct
investment in warehousing and the cold storage
sector. A lack of quantity and quality warehouses
is a major drawback in Indian commodity markets.
"Lack of sufficient warehouses is a big
problem causing wastages," said FMC's Patil. "But
the situation is improving. For instance, three
years ago we did not have cold storage vans, which
are now being used increasingly with the advent of
big supermarket chains."
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