Summer Internship Project Report on commodity market in India

7/27/2019 Summer Internship Project Report on commodity market in India

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Summer Internship Project Report

on

STUDY OF OPERTAIONS OF VARIOUS FINANCIAL MARKET WITH

SPECIAL EMPHASIS ON COMMODITY MARKET IN INDIA

By

Siddharth Agarwal

A0101912142

MBA Class of 2014

Under the supervision of

Ms. Swati Bhatnagar

Assistant Professor

Department of Marketing

In Partial Fulfillment of the Requirements for the Degree of

Masters of Business Administration

at

AMITY BUSINESS SCHOOL

AMITY UNIVERSITY UTTARPRADESH

SECTOR 125, NOIDA-201303,UTTARPRADESH, INDIA


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DECLARATION

Title of Project Report

Study Of Operations Of Various Financial Market With Special Emphasis On CommodityMarket In India

I declare

(a)That the work presented for assessment in this Summer Internship Report is my own, that ithas not previously been presented for another assessment and that my debts (for words, data,arguments and ideas) have been appropriately acknowledged

(b)That the work conforms to the guidelines for presentation and style set out in the relevantdocumentation.

Date:Siddharth Agarwal

A0101912142

MBA class of 2014


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CERTIFICATE

I Ms. Swati Bhatnagar hereby certify that Siddharth Agarwal student of Masters of Business

Administration at Amity Business School, Amity University Uttar Pradesh has completed the

Project Report on Study of operations of various financial markets with special emphasis on

commodity market in India.

Ms. Swati Bhatnagar

Assistant Professor

Department of Marketing


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CERTIFICATE FROM ORGANIZATION


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ACKNOWLEDGEMENT

An undertaking of work life - this is never an outcome of a single person; rather it bears the

imprints of a number of people who directly or indirectly helped me in completing the present

study. I would be failing in my duties if I don't say a word of thanks to all those who made my

training period educative and pleasurable one. I am thankful to INDIAINFOLINE LIMITED,

DELHI for giving me an opportunity to do summer training in the company.

First of all, I am extremely grateful to Mr. Ashwani kumar (Associate vice president) for his

guidance, encouragement and tutelage during the course of the internship despite his extremely

busy schedule. My very special thanks to him for giving me the opportunity to do this project

and for his support throughout as a mentor.

I must also thank my faculty guide Ms. Swati Bhatnagar (Faculty, Amity Business School) for

her continuous support, mellow criticism and able directional guidance during the project.

I would also like to thank all the respondents for giving their precious time and relevant

information and experience, I required, without which the Project would have been incomplete.

Finally I would like to thank all lecturers, friends and my family for their kind support and to all

who have directly or indirectly helped me in preparing this project report. And at last I am

thankful to all divine light and my parents, who kept my motivation and zest for knowledge

always high through the tides of time.


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TABLE OF CONTENTS

Chapter 1: Introduction to Company..1

1.1 Introduction to Derivatives ..4

1.1.2 Products, Participants and Functions..5

1.1.3 Economic function performed with the help of derivative market.6

1.1.4 Types of derivative market.7

1.1.5 Difference between commodity and financial derivative...9

1.1.6 Quality of underlying Assets.11

1.2 Introduction to Commodity Market11

1.2.1 History of evolution of commodity market....15

1.2.2 History of commodity market in India...16

1.2.3 Legal framework for regulatory commodity futures in India.18

1.2.4 How commodity market works...22

1.2.5 Current scenario in Indian commodity market...23

Chapter 2: Literature Review.32

Chapter 3: Research methodology.36

Chapter 4: Analysis and Interpretations.39

Chapter 5: Conclusion and Recommendations..56

References..59

Annexure61


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List of Tables

1.1 Commodity exchange in India and commodities traded21

1.2 Commodity futures trade in India...24

1.3 Volume and value of trade..26

1.4 Top commodities traded on MCX..27

1.5 Top commodities traded on NCDEX.28

1.6 Top commodities traded on NCME...29

1.7 Top commodities traded on ICEX.30

1.8 Top commodities traded on ACE...31


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List of Graphs

4.1 Analysis of investors preference.40

4.2 Investor preference towards financial market.40

4.3 Investors attitude towards financial market41

4.4 Preference of investors in commodity market.42

4.5 Index preference of investors..42

4.6 Reason for resistance in commodity market43

4.7 Source of information to investors..43

4.8 Rating of investors towards various attributes ...44


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List of Figures

1.1 Indian commodity future exchange..21

1.2 Working of commodity market22


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ABSTRACT

As we know that Indian economy is an agriculture economy as around more than half of the

population depends upon agriculture sector. Agriculture sector contributes a vast amount to GDP

of the economy. So, India is one of the top producers of large number of commodities and also

has a long history of trading in commodities and related derivatives. Commodity is any product

that can be used for commerce or an article of commerce which is traded on an authorized

commodity exchange is known as commodity. The article should be movable of value,

something which is bought or sold and which is produced or used as the subject or barter or sale.

All goods and products of agricultural (including plantation), mineral and fossil origin are

allowed for commodity trading recognized under the FCRA. The national commodity exchanges,

recognized by the Central Government, permits commodities which include precious (gold and

silver) and non-ferrous metals, cereals and pulses, ginned and un-ginned cotton, oilseeds, oils

and oilcakes, raw jute and jute goods, sugar and gur, potatoes and onions, coffee and tea, rubber

and spices. Etc.

The Commodities Derivatives market has seen ups and downs, but seems to have finally arrived

now. The market has made enormous progress in terms of Technology, transparency and trading

activity. As majority of Indian investors are not aware of organized commodity market; their

perception about is of risky to very risky investment. Many of them have wrong impression

about commodity market in their minds. It makes them specious towards commodity market.

So the basic aim of this study is to understand the functioning of Commodity Market in India in

relation to various exchanges that are available for trading under this market and current scenario

of commodity market in India along with rules and regulations under this market. The study also

pertains to understand the rationale or behavior of investors towards commodity market which

basically aims to understand the perception of retail investors in comparison to other markets

through a means of structured questionnaire.


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CHAPTER 1: INTRODUCTION


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IIFL (India Infoline group), comprising the holding company, India Infoline Ltd (NSE:

INDIAINFO,BSE: 532636) and its subsidiaries, is one ofone of Indias premier providers of

financial services.

IIFL offers advice and an execution platform for the entire range of financial services covering

products ranging from loans, wealth management, asset management, insurance, fixed deposits,

investment banking, equities and derivatives, commodities, Government of India bonds and other

small savings instruments.

It owns and manages the website,www.indiainfoline.com, which is one of Indias leading online

destinations for personal finance, economy, corporate updates and equity and commodity-related

updates.

The company services 2.1 million customers with a team of 14,000 employees in 3,820 business

locations present in eight countries.

The facilities provided by IIFL are:-

Credit and finance:The facility is offered by subsidiaries India Infoline Finance Ltd and India

Infoline Housing Finance Ltd. The diversified lending portfolio includes home loans, healthcare

finance for medical equipments, SME and trader loans, secured loans against gold jewellery,

commercial vehicle financing, property loans, and capital market finance secured against

securities. In FY13, this segment posted an 82.10% year-on-year growth in revenues

at Rs. 17.37bn. The high quality loan book ofRs. 93.75bn as on March 31, 2013 is backed by

strong capital adequacy of over 20% well above the stipulated 15%.

Private wealth management:In an increasingly unpredictable world, there is greater investor

need for a comprehensive wealth management solution as opposed to disparate services. Under

this segment, IIFL Private Wealth offers advisory services to high net worth individuals and

corporate clients. It manages overRs. 400bn of assets under advice on a client base exceeding

7,000 families.

Financial products division:The Group distributes a range of financial products like insurance,

mutual funds, National Pension Scheme, bonds and debentures through its extensive distribution

network. The company is a leader among non-bank promoted entities in the distribution of life

insurance and mutual funds. For FY13, annual premium mobilisation stood at Rs. 3.2bn.

Asset management:The business was launched in 2011 with a unique proposition. The maiden

scheme was, and still is, the lowest cost Nifty ETF in India. A total of six schemes have been


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launched, including four close-ended debt schemes and two open-ended equity schemes. Total

Assets Under Management stands at Rs. 3.27bn as on March 31, 2013.

Equity, commodities and currency:Though the contribution to revenues is less than 15%, IIFL

Group continues to remain a leading online and offline broking as well as advisory services

provider for cash and derivative segments directed at retail and institutional clients. Over a

decade, the company has created a brand marked by informed research, systemic uptime,

transaction speed, cutting-edge technology, extensive footprint, high service standards and

competitive brokerage. It pioneered the concept of internet broking in India and rationalised

brokerage rates from 1-1.5% in the late 90s to as low as 0.05%. The extension into commodities

and currency trading reconciles with its vision to emerge as a one-stop-shop financial

intermediary.

Awards and recognition:IIFL has been awarded the Best Broker, India by FinanceAsia and the

Most Improved Brokerage, India in the AsiaMoney polls. India Infoline was also adjudged as

Fastest Growing Equity Broking House - Large firms by Dun & Bradstreet. A forerunner in the

field of equity research, IIFLs research is acknowledged by none other than Forbes as Best of

the Web and a must read for investors in Asia.

Core strength: Research

A forerunner in the field of equity research, IIFLs research is acknowledged by none other than

Forbes as Best of the Web and a must read for investors in Asia. IIFL research is available

not just over the Internet but also on international wire services like Bloomberg, Thomson, Dow

Jones Factiva and Internet Securities. It is amongst the most read incisive pieces from among

Indian brokerages.

Some key milestones:

On a consolidated basis, the company has posted a record all-time high income and profit for

FY13. Income and profit stood at Rs. 26.7bn and Rs. 2.79bn, respectively. Some important

milestones for the year gone by include loan book at Rs. 93.75bn, total borrowing at Rs. 92.2bn,

capital adequacy ratio of 21.6%, net interest margin of 9.5%, net non-performing assets at 0.17%

and cost to income ratio of 58.16%.

The company supports employment of over 24,000 people directly and thousands more

indirectly. The company services its 2.1mn customers through its network of 3,820 locations

present in 900 cities, covering literally every nook and corner of the country.

IIFL is physically present in key global markets includes subsidiaries in Colombo, Dubai, New

York, Mauritius, London, Singapore and Hong Kong.


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It is a proud corporate citizen with cumulative contribution since inception to the exchequer of

overRs. 5 bn.

The company has set an example for the peer group with its financial literacy campaign or

Financial Literacy Agenda For Mass Empowerment touching more than 30mn people.

IIFLs short-term debt is rated CRISIL A1+ and ICRA (A1+) by Crisil and ICRA, respectively.

For the long-term, it has been rated ICRA(AA-) and CRISIL AA-/Stable indicating a high degree

of safety for timely servicing of financial obligations.

1.1 Introduction To Derivatives

The origin of derivatives can be traced back to the need of farmers to protect themselves against

fluctuations in the price of their crop. From the time of sowing to the time of crop harvest,farmers would face price uncertainty. Through the use of simple derivative products, it was

possible for the farmer to partially or fully transfer price risks by locking-in asset prices. These

were simple contracts developed to meet the needs of farmers and were basically a means of

reducing risk.

A farmer who sowed his crop in June faced uncertainty over the price he would receive for his

harvest in September. In years of scarcity, he would probably obtain attractive prices. However,

during times of oversupply, he would have to dispose off his harvest at a very low price.

Clearly this meant that the farmer and his family were exposed to a high risk of price uncertainty.

On the other hand, a merchant with an ongoing requirement of grains too would face a price risk

that of having to pay exorbitant prices during scarcity, although favorable prices could be

obtained during periods of oversupply. Under such circumstances, it clearly made sense for the

farmer and the merchant to come together and enter into a contract whereby the price of the grain

to be delivered in September could be decided earlier. What they would then negotiate happened

to be a futures-type contract, which would enable both parties to eliminate the price risk.

In 1848, the Chicago Board of Trade (CBOT) was established to bring farmers and merchants

together. A group of traders got together and created the `to-arrive' contract that permitted

farmers to lock in to price upfront and deliver the grain later. These to-arrive contracts proved

useful as a device for hedging and speculation on price changes. These were eventually

standardized, and in 1925 the first futures clearing house came into existence.

Today, derivative contracts exist on a variety of commodities such as corn, pepper, cotton,


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wheat, silver, etc. Besides commodities, derivatives contracts also exist on a lot of financial

underlying like stocks, interest rate, exchange rate, etc.

Derivates can be defined as, "A derivative is a product whose value is derived from the value of

one or more underlying variables or assets in a contractual manner." The underlying asset can be

equity, forex, commodity or any other asset. As earlier stated, we saw that wheat farmers may

wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date.

Such a transaction is an example of a derivative. The price of this derivative is driven by the spot

price of wheat which is the 'underlying' in this case.

The Forward Contracts (Regulation) Act, 1952, regulates the forward/ futures contracts in

commodities all over India. As per this Act, the Forward Markets Commission (FMC) continues

to have jurisdiction over commodity forward/ futures contracts. However, when derivatives

trading in securities was introduced in 2001, the term 'security' in the Securities Contracts

(Regulation) Act, 1956 (SC(R)A), was amended to include derivative contracts in securities.

Consequently, regulation of derivatives came under the purview of Securities Exchange Board of

India (SEBI). We thus have separate regulatory authorities for securities and commodity

derivative markets.

Derivatives are securities under the SC(R)A and hence the trading of derivatives is governed bythe regulatory framework under the SC(R)A. The Securities Contracts (Regulation) Act, 1956

defines 'derivative' to include -

1. A security derived from a debt instrument, share, loan whether secured or unsecured,

risk instrument or contract for differences or any other form of security.

2. A contract which derives its value from the prices, or index of prices, of underlying

securities.

1.1.2 Products, Participants And Functions

Derivative contracts are of different types. The most common ones are forwards, futures, options

and swaps. Participants who trade in the derivatives market can be classified under the following

three broad categories: hedgers, speculators, and arbitragers.

1. Hedgers: The farmer's example that we discussed about was a case of hedging. Hedgers

face risk associated with the price of an asset. They use the futures or options markets to

reduce or eliminate this risk.


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2. Speculators: Speculators are participants who wish to bet on future movements in the

price of an asset. Futures and options contracts can give them leverage; that is, by

putting in small amounts of money upfront, they can take large positions on the market.

As a result of this leveraged speculative position, they increase the potential for large

gains as well as large losses.

3. Arbitragers: Arbitragers work at making profits by taking advantage of discrepancy

between prices of the same product across different markets. If, for example, they see

the futures price of an asset getting out of line with the cash price, they would take

offsetting positions in the two markets to lock in the profit.

1.1.3 Economic functions performed with the help of derivative market:

Prices in an organized derivatives market reflect the perception of market participants

about the future and lead the prices of underlying to the perceived future level. The

prices of derivatives converge with the prices of the underlying at the expiration of the

derivative contract. Thus, derivatives help in discovery of future as well as current

prices.

The derivatives market helps to transfer risks from those who have them but may not

like them to those who have an appetite for them.

Derivatives, due to their inherent nature, are linked to the underlying cash markets.

With the introduction of derivatives the underlying market witnesses higher trading

volumes, because of participation by more players who would not otherwise participate

for lack of an arrangement to transfer risk.

Speculative traders shift to a more controlled environment of the derivatives market. In

the absence of an organized derivatives market, speculators trade in the underlying cash

markets. Margining, monitoring and surveillance of the activities of various participants

become extremely difficult in these kinds of mixed markets.

An important incidental benefit that flows from derivatives trading is that it acts as a

catalyst for new entrepreneurial activity. Derivatives have a history of attracting many

bright, creative, well-educated people with an entrepreneurial attitude. They often

energize others to create new businesses, new products and new employment


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opportunities, the benefit of which are immense.

Derivatives markets help increase savings and investment in the long run. The transfer of

risk enables market participants to expand their volume of activity

1.1.4 Types of derivative markets

Derivatives markets can broadly be classified as commodity derivatives market and financial

derivatives markets. As the name suggest, commodity derivatives markets trade contracts are

those for which the underlying asset is a commodity. It can be an agricultural commodity like

wheat, soybeans, rapeseed, cotton, etc or precious metals like gold, silver, etc. or energy products

like crude oil, natural gas, coal, electricity etc. Financial derivatives markets trade contracts have

a financial asset or variable as the underlying. The more popular financial derivatives are those

which have equity, interest rates and exchange rates as the underlying. The most commonly used

derivatives contracts are forwards, futures and options.

Spot versus Forward Transaction

Every transaction has three components - trading, clearing and settlement. A buyer and seller

come together, negotiate and arrive at a price. This is trading. Clearing involves finding out the

net outstanding, that is exactly how much of goods and money the two should exchange. For

instance, A buys goods worth Rs.100 from B and sells goods worth Rs. 50 to B. On a net basis,

A has to pay Rs. 50 to B. Settlement is the actual process of exchanging money and goods. Using

the example of a forward contract, let us try to understand the difference between a spot and

derivatives contract.

In a spot transaction, the trading, clearing and settlement happens instantaneously, i.e. 'on the

spot'. Consider this example. On 1st January 2010, Aditya wants to buy some gold. The

goldsmith quotes Rs. 17,000 per 10 grams. They agree upon this price and Aditya buys 20 grams

of gold. He pays Rs.34,000, takes the gold and leaves. This is a spot transaction.

Now suppose, Aditya does not want to buy the gold on the 1st January, but wants to buy it a

month later. The goldsmith quotes Rs. 17,100 per 10 grams. They agree upon the 'forward' price

for 20 grams of gold that Aditya wants to buy and Aditya leaves. A month later, he pays the

goldsmith Rs. 34,200 and collects his gold. This is a forward contract, a contract by which two

parties irrevocably agree to settle a trade at a future date, for a stated price and quantity. No

money changes hands when the contract is signed. The exchange of money and the underlying


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goods only happens at the future date as specified in the contract. In a forward contract, the

process of trading, clearing and settlement does not happen instantaneously. The trading happens

today, but the clearing and settlement happens at the end of the specified period.

A forward contract is the most basic derivative contract. We call it a derivative because it derives

value from the price of the asset underlying the contract, in this case- gold. If on the1st of

February, gold trades for Rs. 17,200 per 10 grams in the spot market, the contract becomes more

valuable to Aditya because it now enables him to buy gold at Rs.17,100 per 10 grams. If

however, the price of gold drops down to Rs. 16,900 per 10 grams he is worse off because as per

the terms of the contract, he is bound to pay Rs. 17,100 per 10 grams for the same gold. The

contract has now lost value from Adyta's point of view. Note that the value of the forward

contract to the goldsmith varies exactly in an opposite manner to its value for Aditya.

Exchange Traded Versus OTC Derivatives

Derivatives have probably been around for as long as people have been trading with one another.

Forward contracting dates back at least to the 12th century and may well have been around

before then. These contracts were typically OTC kind of contracts. Over the counter (OTC)

derivatives are privately negotiated contracts. Merchants entered into contracts with one another

for future delivery of specified amount of commodities at specified price. A primary motivationfor prearranging a buyer or seller for a stock of commodities in early forward contracts was to

lessen the possibility that large swings would inhibit marketing the commodity after a harvest

Later many of these contracts were standardized in terms of quantity and delivery dates and

began to trade on an exchange.

The OTC derivatives markets have the following features compared to exchange-traded

derivatives:

1. The management of counter-party (credit) risk is decentralized and located within

individual institutions.

2. There are no formal centralized limits on individual positions, leverage, or margining.

3. There are no formal rules for risk and burden-sharing.

4. There are no formal rules or mechanisms for ensuring market stability and integrity, and

for safeguarding the collective interests of market participants.

5. The OTC contracts are generally not regulated by a regulatory authority and the


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exchange's self-regulatory organization, although they are affected indirectly by national

legal systems, banking supervision and market surveillance.

The derivatives markets have witnessed rather sharp growth over the last few years, which have

accompanied the modernization of commercial and investment banking and globalization of

financial activities. The recent developments in information technology have contributed to a

great extent to these developments. While both exchange-traded and OTC derivative contracts

offer many benefits, the former have rigid structures compared to the latter.

The largest OTC derivative market is the inter-bank foreign exchange market. Commodity

derivatives, the world over are typically exchange-traded and not OTC in nature.

1.1.5 Difference Between Commodity And Financial Derivatives

The basic concept of a derivative contract remains the same whether the underlying happens to

be a commodity or a financial asset. However, there are some features which are very peculiar to

commodity derivative markets. In the case of financial derivatives, most of these contracts are

cash settled. Since financial assets are not bulky, they do not need special facility for storage

even in case of physical settlement. On the other hand, due to the bulky nature of the underlying

assets, physical settlement in commodity derivatives creates the need for warehousing. Similarly,

the concept of varying quality of asset does not really exist as far as financial underlying are

concerned. However, in the case of commodities, the quality of the asset underlying a contract

can vary largely. This becomes an important issue to be managed. We have a brief look at these

issues.

Physical Settlement

Physical settlement involves the physical delivery of the underlying commodity, typically at an

accredited warehouse. The seller intending to make delivery would have to take the commodities

to the designated warehouse and the buyer intending to take delivery would have to go to the

designated warehouse and pick up the commodity. This may sound simple, but the physical

settlement of commodities is a complex process. The issues faced in physical settlement are

enormous. There are limits on storage facilities in different states. There are restrictions on

interstate movement of commodities. Besides state level octroi and duties have an impact on the


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cost of movement of goods across locations. The process of taking physical delivery in

commodities is quite different from the process of taking physical delivery in financial assets.

Delivery notice period

Unlike in the case of equity futures, typically a seller of commodity futures has the option to give

notice of delivery. This option is given during a period identified as `delivery notice period'.

Assignment

Whenever delivery notices are given by the seller, the clearing house of the Exchange identifies

the buyer to whom this notice may be assigned. Exchanges follow different practices for the

assignment process.

Delivery

The procedure for buyer and seller regarding the physical settlement for different types of

contracts is clearly specified by the Exchange. The period available for the buyer to take physicaldelivery is stipulated by the Exchange. Buyer or his authorized representative in the presence of

seller or his representative takes the physical stocks against the delivery order. Proof of physical

delivery having been effected is forwarded by the seller to the clearing house and the invoice

amount is credited to the seller's account.

The clearing house decides on the delivery order rate at which delivery will be settled. Delivery

rate depends on the spot rate of the underlying adjusted for discount/ premium for quality and

freight costs. The discount/ premium for quality and freight costs are published by the clearinghouse before introduction of the contract. The most active spot market is normally taken as the

benchmark for deciding spot prices.

Warehousing

One of the main differences between financial and commodity derivative is the need for

warehousing. In case of most exchange-traded financial derivatives, all the positions are cash

settled. Cash settlement involves paying up the difference in prices between the time the contract

was entered into and the time the contract was closed. For instance, if a trader buys futures on a


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stock at Rs.100 and on the day of expiration, the futures on that stock close at Rs.120, he does

not really have to buy the underlying stock. All he does is take the difference of Rs.20 in cash.

Similarly, the person who sold this futures contract at Rs.100 does not have to deliver the

underlying stock. All he has to do is pay up the loss of Rs.20 in cash.

In case of commodity derivatives however, there is a possibility of physical settlement. It means

that if the seller chooses to hand over the commodity instead of the difference in cash,

the buyer must take physical delivery of the underlying asset. This requires the Exchange to

make an arrangement with warehouses to handle the settlements. The efficacy of the

commodities settlements depends on the warehousing system available. Such warehouses have to

perform the following functions:

Earmark separate storage areas as specified by the Exchange for storing commodities;

Ensure proper grading of commodities before they are stored;

Store commodities according to their grade specifications and validity period; and

Ensure that necessary steps and precautions are taken to ensure that the quantity and

grade of commodity, as certified in the warehouse receipt, are maintained during the

storage period. This receipt can also be used as collateral for financing.

In India, NCDEX has accredited over 775 delivery centers which meet the requirements for the

physical holding of goods that are to be delivered on the platform. As future trading is delivery

based, it is necessary to create the logistics support for the same.

1.1.6 Quality of Underlying Assets

A derivatives contract is written on a given underlying. Variance in quality is not an issue in case

of financial derivatives as the physical attribute is missing. When the underlying asset is a

commodity, the quality of the underlying asset is of prime importance. There may be quite some

variation in the quality of what is available in the marketplace. When the asset is specified, it is

therefore important that the Exchange stipulate the grade or grades of the commodity that are

acceptable. Commodity derivatives demand good standards and quality assurance/ certification

procedures. A good grading system allows commodities to be traded by specification.

Trading in commodity derivatives also requires quality assurance and certifications from

specialized agencies. In India, for example, the Bureau of Indian Standards (BIS) under theDepartment of Consumer Affairs specifies standards for processed agricultural commodities.


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AGMARK, another certifying body under the Department of Agriculture and Cooperation,

specifies standards for basic agricultural commodities.

1.2 INTRODUCTION TO COMMODITY MARKET

What is Commodity?

Any product that can be used for commerce or an article of commerce which is traded on an

authorized commodity exchange is known as commodity. The article should be movable of

value, something which is bought or sold and which is produced or used as the subject or barter

or sale. In short commodity includes all kinds of goods. Indian Forward Contracts (Regulation)

Act (FCRA), 1952 defines goods as every kind of movable property other than actionable

claims, money and securities.

In current situation, all goods and products of agricultural (including plantation), mineraland

fossil origin are allowed for commodity trading recognized under the FCRA. The national

commodity exchanges, recognized by the Central Government, permits commodities which

include precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and un-

ginned cotton, oilseeds, oils and oilcakes, raw jute and jute goods, sugar and gur, potatoes and

onions, coffee and tea, rubber and spices. Etc.

What is a commodity exchange?

A commodity exchange is an association or a company or any other body corporate organizing

futures trading in commodities for which license has been granted by regulating authority.

What is Commodity Future

A Commodity futures is an agreement between two parties to buy or sell a specified and

standardized quantity of a commodity at a certain time in future at a price agreed upon at the

time of entering into the contract on the commodity futures exchange. The need for a futures

market arises mainly due to the hedging function that it can perform. Commodity markets, like

any other financial instrument, involve risk associated with frequent price volatility. The loss due

to price volatility can be attributed to the following reasons:

Consumer Preferences: - In the short-term, their influence on price volatility is small since it is

a slow process permitting manufacturers, dealers and wholesalers to adjust their inventory in

advance.


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Changes in supply: - They are abrupt and unpredictable bringing about wild fluctuations in

prices. This can especially noticed in agricultural commodities where the weather plays a major

role in affecting the fortunes of people involved in this industry. The futures market has evolved

to neutralize such risks through a mechanism; namely hedging.

The objectives of Commodity futures: -

Hedging with the objective of transferring risk related to the possession of physical assets

through any adverse moments in price. Liquidity and Price discovery to ensure base

minimum volume in trading of a commodity through market information and demand

supply factors that facilitates a regular and authentic price discovery mechanism.

Maintaining buffer stock and better allocation of resources as it augments reduction in

inventory requirement and thus the exposure to risks related with price fluctuation

declines. Resources can thus be diversified for investments.

Price stabilization along with balancing demand and supply position. Futures trading

leads to predictability in assessing the domestic prices, which maintains stability, thus

safeguarding against any short term adverse price movements. Liquidity in Contracts of

the commodities traded also ensures in maintaining the equilibrium between demand and

supply.

Flexibility, certainty and transparency in purchasing commodities facilitate bankfinancing. Predictability in prices of commodity would lead to stability, which in turn

would eliminate the risks associated with running the business of trading commodities.

This would make funding easier and less stringent for banks to commodity market

players.

Benefits of Commodity Futures Markets:-

The primary objectives of any futures exchange are authentic price discovery and an efficientprice risk management. The beneficiaries include those who trade in the commodities being

offered in the exchange as well as those who have nothing to do with futures trading. It is

because of price discovery and risk management through the existence of futures exchanges that

a lot of businesses and services are able to function smoothly.

1. Price Discovery:-Based on inputs regarding specific market information, the demand

and supply equilibrium, weather forecasts, expert views and comments, inflation rates,

Government policies, market dynamics, hopes and fears, buyers and sellers conducttrading at futures exchanges. This transforms in to continuous price discovery


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mechanism. The execution of trade between buyers and sellers leads to assessment of fair

value of a particular commodity that is immediately disseminated on the trading terminal.

2. Price Risk Management: - Hedging is the most common method of price risk

management. It is strategy of offering price risk that is inherent in spot market by taking

an equal but opposite position in the futures market. Futures markets are used as a mode

by hedgers to protect their business from adverse price change. This could dent the

profitability of their business. Hedging benefits who are involved in trading of

commodities like farmers, processors, merchandisers, manufacturers, exporters, importers

etc.

3. Import- Export competitiveness: - The exporters can hedge their price risk and

improve their competitiveness by making use of futures market. A majority of traders

which are involved in physical trade internationally intend to buy forwards. The

purchases made from the physical market might expose them to the risk of price risk

resulting to losses. The existence of futures market would allow the exporters to hedge

their proposed purchase by temporarily substituting for actual purchase till the time is

ripe to buy in physical market. In the absence of futures market it will be meticulous,

time consuming and costly physical transactions.

4. Predictable Pricing: - The demand for certain commodities is highly price elastic. The

manufacturers have to ensure that the prices should be stable in order to protect their

market share with the free entry of imports. Futures contracts will enable predictability in

domestic prices. The manufacturers can, as a result, smooth out the influence of changes

in their input prices very easily. With no futures market, the manufacturer can be caught

between severe short-term price movements of oils and necessity to maintain price

stability, which could only be possible through sufficient financial reserves that could

otherwise be utilized for making other profitable investments.

5. Benefits for farmers/Agriculturalists: - Price instability has a direct bearing on farmers

in the absence of futures market. There would be no need to have large reserves to cover

against unfavorable price fluctuations. This would reduce the risk premiums associated

with the marketing or processing margins enabling more returns on produce. Storing


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more and being more active in the markets. The price information accessible to the

farmers determines the extent to which traders/processors increase price to them. Since

one of the objectives of futures exchange is to make available these prices as far as

possible, it is very likely to benefit the farmers. Also, due to the time lag between

planning and production, the market-determined price information disseminated by

futures exchanges would be crucial for their production decisions.

6. Credit accessibility: - The absence of proper risk management tools would attract the

marketing and processing of commodities to high-risk exposure making it risky business

activity to fund. Even a small movement in prices can eat up a huge proportion of capital

owned by traders, at times making it virtually impossible to pay back the loan. There is a

high degree of reluctance among banks to fund commodity traders, especially those who

do not manage price risks. If in case they do, the interest rate is likely to be high and

terms and conditions very stringent. This posses a huge obstacle in the smooth

functioning and competition of commodities market. Hedging, which is possible through

futures markets, would cut down the discount rate in commodity lending.

7. Improved product quality: - The existence of warehouses for facilitating delivery with

grading facilities along with other related benefits provides a very strong reason to

upgrade and enhance the quality of the commodity to grade that is acceptable by the

exchange. It ensures uniform standardization of commodity trade, including the terms of

quality standard: the quality certificates that are issued by the exchange-certified

warehouses have the potential to become the norm for physical trade.

History of Evolution of commodity markets

Commodities future trading was evolved from need of assured continuous supply of seasonal

agricultural crops. The concept of organized trading in commodities evolved in Chicago, in

1848. But one can trace its roots in Japan. In Japan merchants used to store Rice in warehouses

for future use. To raise cash warehouse holders sold receipts against the stored rice. These were

known as rice tickets. Eventually, these rice tickets become accepted as a kind of commercial

currency. Latter on rules came in to being, to standardize the trading in rice tickets. In 19th

century Chicago in United States had emerged as a major commercial hub. So that wheat

producers from Mid-west attracted here to sell their produce to dealers & distributors. Due to


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lack of organized storage facilities, absence of uniform weighing & grading mechanisms

producers often confined to the mercy of dealers discretion. These situations lead to need of

establishing a common meeting place for farmers and dealers to transact in spot grain to deliver

wheat and receive cash in return.

Gradually sellers & buyers started making commitments to exchange the produce for cash in

future and thus contract for futures trading evolved. Whereby the producer would agree to sell

his produce to the buyer at a future delivery date at an agreed upon price. In this way producer

was aware of what price he would fetch for his produce and dealer would know about his cost

involved, in advance. This kind of agreement proved beneficial to both of them. As if dealer is

not interested in taking delivery of the produce, he could sell his contract to someone who needs

the same. Similarly producer who not intended to deliver his produce to dealer could pass on the

same responsibility to someone else. The price of such contract would dependent on the price

movements in the wheat market. Latter on by making some modifications these contracts

transformed in to an instrument to protect involved parties against adverse factors such as

unexpected price movements and unfavorable climatic factors. This promoted traders entry in

futures market, which had no intentions to buy or sell wheat but would purely speculate on price

movements in market to earn profit.

Trading of wheat in futures became very profitable which encouraged the entry of other

commodities in futures market. This created a platform for establishment of a body to regulate

and supervise these contracts. Thats why Chicago Board of Trade (CBOT) was established in

1848. In 1870 and 1880s the New York Coffee, Cotton and Produce Exchanges were born.

Agricultural commodities were mostly traded but as long as there are buyers and sellers, any

commodity can be traded. In 1872, a group of Manhattan dairy merchants got together to bring

chaotic condition in New York market to a system in terms of storage, pricing, and transfer of

agricultural products. In 1933, during the Great Depression, the Commodity Exchange, Inc. was

established in New York through the merger of four small exchanges the National Metal

Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the New

York Hide Exchange.

The largest commodity exchange in USA is Chicago Board of Trade, The Chicago Mercantile

Exchange, the New York Mercantile Exchange, the New York Commodity Exchange and New

York Coffee, sugar and cocoa Exchange. Worldwide there are major futures trading exchanges

in over twenty countries including Canada, England, India, France, Singapore, Japan, Australia

and New Zealand.


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History of Commodity Market in India:-

The Commodity Futures market in India dates back to more than a century. The first organized

futures market was established in 1875, under the name of Bombay Cotton Trade Association

to trade in cotton derivative contracts. This was followed by institutions for futures trading in

oilseeds, food grains, etc. The futures market in India underwent rapid growth between the

period of First and Second World War. As a result, before the outbreak of the Second World

War, a large number of commodity exchanges trading futures contracts in several commodities

like cotton, groundnut, groundnut oil, raw jute, jute goods, castor seed, wheat, rice, sugar,

precious metals like gold and silver were flourishing throughout the country. In view of the

delicate supply situation of major commodities in the backdrop of war efforts mobilization,

futures trading came to be prohibited during the Second World War under the Defence of India

Act. After Independence, especially in the second half of the 1950s and first half of 1960s, the

commodity futures trading again picked up and there were thriving commodity markets.

However, in mid-1960s, commodity futures trading in most of the commodities was banned and

futures trading continued in two minor commodities, viz, pepper and turmeric.

The history of organized commodity derivatives in India goes back to the nineteenth century

when Cotton Trade Association started futures trading in 1875, about a decade after they started

in Chicago. Over the time datives market developed in several commodities in India. Following

Cotton, derivatives trading started in oilseed in Bombay (1900), raw jute and jute goods in

Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920).

However many feared that derivatives fuelled unnecessary speculation and were detrimental to

the healthy functioning of the market for the underlying commodities, resulting in to banning of

commodity options trading and cash settlement of commodities futures after independence in

1952. The parliament passed the Forward Contracts (Regulation) Act, 1952, which regulated

contracts in Commodities all over the India. The act prohibited options trading in Goods along

with cash settlement of forward trades, rendering a crushing blow to the commodity derivatives

market. Under the act only those associations/exchanges, which are granted reorganization from

the Government, are allowed to organize forward trading in regulated commodities. The act

envisages three tire regulations: (i) Exchange which organizes forward trading in commodities

can regulate trading on day-to-day basis; (ii) Forward Markets Commission provides regulatory

oversight under the powers delegated to it by the central Government. (iii) The Central


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Government- Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public

Distribution- is the ultimate regulatory authority.

The commodities future market remained dismantled and remained dormant for about four

decades until the new millennium when the Government, in a complete change in a policy,

started actively encouraging commodity market. After Liberalization and Globalization in 1990,

the Government set up a committee (1993) to examine the role of futures trading. The

Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17

commodity groups. It also recommended strengthening Forward Markets Commission, and

certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing option

trading in goods and registration of brokers with Forward Markets Commission. The

Government accepted most of these recommendations and futures trading was permitted in all

recommended commodities. It is timely decision since internationally the commodity cycle is on

upswing and the next decade being touched as the decade of Commodities.

Commodity exchange in India plays an important role where the prices of any commodity are

not fixed, in an organized way. Earlier only the buyer of produce and its seller in the market

judged upon the prices. Others never had a say.

Today, commodity exchanges are purely speculative in nature. Before discovering the price,

they reach to the producers, end-users, and even the retail investors, at a grassroots level. It

brings a price transparency and risk management in the vital market. A big difference between a

typical auction, where a single auctioneer announces the bids and the Exchange is that people are

not only competing to buy but also to sell. By Exchange rules and by law, no one can bid under a

higher bid, and no one can offer to sell higher than someone elses lower offer. That keeps the

market as efficient as possible, and keeps the traders on their toes to make sure no one gets the

purchase or sale before they do. Since 2002, the commodities future market in India has

experienced an unexpected boom in terms of modern exchanges, number of commodities

allowed for derivatives trading as well as the value of futures trading in commodities, which

crossed $ 1 trillion mark in 2006. Since 1952 till 2002 commodity datives market was virtually

non- existent, except some negligible activities on OTC basis.

In India there are 25 recognized future exchanges, of which there are three national level multi-

commodity exchanges. After a gap of almost three decades, Government of India has allowed

forward transactions in commodities through Online Commodity Exchanges, a modification of

traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and

delivery of commodities. The three exchanges are: National Commodity & Derivatives


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Exchange Limited (NCDEX) Mumbai, Multi Commodity Exchange of India Limited (MCX)

Mumbai and National Multi-Commodity Exchange of India Limited (NMCEIL)

Ahmedabad.There are other regional commodity exchanges situated in different parts of India.

Legal framework for regulating commodity futures in India:-

The commodity futures traded in commodity exchanges are regulated by the Government under

the Forward Contracts Regulations Act, 1952 and the Rules framed there under. The regulator

for the commodities trading is the Forward Markets Commission, situated at Mumbai, which

comes under the Ministry of Consumer Affairs Food and Public Distribution

Forward Markets Commission (FMC):-

It is statutory institution set up in 1953 under Forward Contracts (Regulation) Act, 1952.

Commission consists of minimum two and maximum four members appointed by Central Govt.

Out of these members there is one nominated chairman. All the exchanges have been set up

under overall control of Forward Market Commission (FMC) of Government of India.

There are 21 Commodity Exchanges (15 Regional and 6 National Exchanges) regulating futures

trading in commodities under the purview of the Forward Markets Commission (FMC). The

country's commodity futures exchanges are divided majorly into two categories:

National exchanges

Regional exchanges

The Five exchanges operating at the national level (as on ) are:

i) National Commodity and Derivatives Exchange of India Ltd. (NCDEX)

ii) National Multi Commodity Exchange of India Ltd. (NMCE)

iii) Multi Commodity Exchange of India Ltd. (MCX)

iv) Indian Commodity Exchange Ltd. (ICEX) which started trading operations on

November 27, 2009

v) ACE Derivatives and Commodity Exchange

The leading regional exchange is the National Board of Trade (NBOT) located at Indore. There

are more than 15 regional commodity exchanges in India.


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National Commodities & Derivatives Exchange Limited (NCDEX)

National Commodities & Derivatives Exchange Limited (NCDEX) promoted by ICICI Bank

Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank of Agriculture

and Rural Development (NABARD) and National Stock Exchange of India Limited (NSC).

Punjab National Bank (PNB), Credit Rating Information Service of India Limited (CRISIL),

Indian Farmers Fertilizer Cooperative Limited (IFFCO), Canara Bank and Goldman Sachs by

subscribing to the equity shares have joined the promoters as a share holder of exchange.

NCDEX is the only Commodity Exchange in the country promoted by national level institutions.

NCDEX is a public limited company incorporated on 23 April 2003. NCDEX is a national level

technology driven on line Commodity Exchange with an independent Board of Directors and

professionals not having any vested interest in Commodity Markets.

It is committed to provide a world class commodity exchange platform for market participants to

trade in a wide spectrum of commodity derivatives driven by best global practices,

professionalism and transparency.

NCDEX is regulated by Forward Markets Commission (FMC). NCDEX is also subjected to the

various laws of land like the Companies Act, Stamp Act, Contracts Act, Forward Contracts

Regulation Act and various other legislations.

NCDEX is located in Mumbai and offers facilities to its members in more than 550 centers

throughout India. NCDEX currently facilitates trading of 57 commodities.

Multi Commodity Exchange of India Limited (MCX)

Multi Commodity Exchange of India Limited (MCX) is an independent and de-mutulized

exchange with permanent reorganization from Government of India, having Head Quarter in

Mumbai. Key share holders of MCX are Financial Technologies (India) Limited, State Bank of

India, Union Bank of India, Corporation Bank of India, Bank of India and Canara Bank. MCX

facilitates online trading, clearing and settlement operations for commodity futures market across

the country. MCX started of trade in Nov 2003 and has built strategic alliance with Bombay

Bullion Association, Bombay Metal Exchange, Solvent Extractors Association of India, pulses

Importers Association and Shetkari Sanghatana.MCX deals with about 100 commodities.

National Multi Commodity Exchange of India Limited (NMCEIL)

National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-mutualised

Electronic Multi Commodity Exchange in India. On 25th

July 2001 it was granted approval by


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Government to organize trading in edible oil complex. It is being supported by Central

warehousing Corporation Limited, Gujarat State Agricultural Marketing Board and Neptune

Overseas Limited. It got reorganization in Oct 2002. NMCEIL Head Quarter is at Ahmedabad.

Some of the features of national and regional exchanges are listed below:

National Exchanges

Compulsory online trading

Transparent trading

Exchanges to be de-mutualised

Exchange recognized on permanent basis

Multi commodity exchange

Large expanding volumes

Regional Exchanges

Online trading not compulsory

De-mutualisation not mandatory

Recognition given for fixed period after which it could be given for re regulation

Generally, these are single commodity exchanges. Exchanges have to apply for trading

each commodity.

Low volumes in niche markets

Figure 1.1

Table 1.1 Commodity Exchanges in India and commodities traded


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No. Exchanges Main Commodities

1 Multi CommodityGold, Silver, Copper, Crude Oil, Zinc, Lead, Nickel,

Natural gas,

Exchange of India Ltd., Aluminium, Mentha Oil, Crude_Palm_Oil, Refined

Mumbai* Soya Oil, Cardamom, Guar Seeds, Kapas, Potato,

Chana\Gram, Melted Menthol Flakes, Almond, Wheat,

Barley, Long Steel, Maize, Soybean Seeds, Gasoline US,

Tin, Kapaskhali, Platinum, Heating Oil

2 National Commodity & Guar Seed, Soy Bean, Soy Oil, Chana,RM Seed, Jeera,

Derivatives Exchange Ltd, Turmeric, Guar Gum, Pepper, Cotton Cake, Long Steel,

Mumbai* Gur, Kapas, Wheat, Red Chilli, Crude Oil, Maize, Gold,

Copper, Castor Seeds, Potato, Barley, Kachhi GhaniMustard Oil, Silver, Indian 28 Mm Cotton, Platinum

3 National Multi Commodity Rape/Mustard Seed, Guar Seeds, Nickel, Jute, Refined

Exchange of India Soya Oil, Zinc, Rubber, Chana\Gram, Isabgul, Lead, Gold,

Limited, Ahmedabad* Aluminium, Copper, Turmeric, Copra, Silver, Raw Jute,

Guar Gum, Pepper, Coffee Robusta, Castor Seeds, Mentha

Oil

How Commodity market works?

There are two kinds of trades in commodities. The first is the spot trade, in which one pays cash

and carries away the goods. The second is futures trade. The underpinning for futures is the

warehouse receipt. A person deposits certain amount of say, good X in a ware house and gets a

warehouse receipt. Which allows him to ask for physical delivery of the good from the

warehouse. But someone trading in commodity futures need not necessarily posses such a receipt

to strike a deal. A person can buy or sale a commodity future on an exchange based on his

expectation of where the price will go. Futures have something called an expiry date, by when

the buyer or seller either closes (square off) his account or give/take delivery of the commodity.

The broker maintains an account of all dealing parties in which the daily profit or loss due to


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changes in the futures price is recorded. Squiring off is done by taking an opposite contract so

that the net outstanding is nil.

For commodity futures to work, the seller should be able to deposit the commodity at warehouse

nearest to him and collect the warehouse receipt. The buyer should be able to take physical

delivery at a location of his choice on presenting the warehouse receipt. But at present in India

very few warehouses provide delivery for specific commodities.

Figure 1.2 Following diagram gives a fair idea about working of the Commodity market.

Today Commodity trading system is fully computerized. Traders need not visit a commodity

market to speculate. With online commodity trading they could sit in the confines of their home

or office and call the shots.

The commodity trading system consists of certain prescribed steps or stages as follows:

I. Trading: - At this stage the following is the system implemented-

- Order receiving

- Execution

- Matching

- Reporting

- Surveillance

- Price limits

- Position limits


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II. Clearing: - This stage has following system in place-

- Matching

- Registration

- Clearing

- Clearing limits

- Notation

- Margining

- Price limits

- Position limits

- Clearing house.

III. Settlement: - This stage has following system followed as follows-- Marking to market

- Receipts and payments

- Reporting

- Delivery upon expiration or maturity.

Current Scenario in Indian Commodity Market

Need of Commodity Derivatives for India:-

India is among top 5 producers of most of the Commodities, in addition to being a major

consumer of bullion and energy products. Agriculture contributes about 22% GDP of Indian

economy. It employees around 57% of the labor force on total of 163 million hectors of land

Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates

that India can be promoted as a major centre for trading of commodity derivatives.

Table 1.2 Commodity Futures Trade in India (Rs Lakhs Crores)

Category for April to February FY2012-13

Total 157.828

Bullion 73.26

Agro 20.203

Metals 29.951

Energy 34.4


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According to Forward Markets Commission (FMC),the value of commodities traded from April

to February 15, 2011-12 was recorded at Rs 159.324 lakh crore in comparison to the value of

commodities traded from April to February FY 2012-13 was recorded at Rs 157.828 lakh crore,

suggesting decline in trading activity in 2012-13.

Trends in volume contribution on the three National Exchanges:-

Pattern on Multi Commodity Exchange (MCX):-

MCX is currently largest commodity exchange in the country in terms of trade volumes,

further it has even become the third largest in bullion and second largest in silver future trading

in the world. Coming to trade pattern, though there are about 100 commodities traded on MCX,

only 3 or 4 commodities contribute for more than 80 percent of total trade volume. As per recent

data the largely traded commodities are Gold, Silver, Energy and base Metals. Incidentally the

futures trends of these commodities are mainly driven by international futures prices rather than

the changes in domestic demand-supply and hence, the price signals largely reflect international

scenario. Among Agricultural commodities major volume contributors include Gur, Urad,

Menthol Oil etc. Whose market sizes are considerably small making then vulnerable to

manipulations.MCX is Indias leading commodity futures exchange with a market share of 87.3

per cent in terms of the value of commodity futures contracts traded in FY 2012-13. The

Exchange was the third largest commodity futures exchange in the world, in terms of the number

of contracts traded in CY2012, based on the Futures Industry Associations annual volume

survey released in March 2013. Moreover, as per the survey, during CY 2012, MCX was the

world's largest exchange in silver and gold futures, second largest in copper and natural gas

futures, and the third largest in crude oil futures.MCX has forged strategic alliances with leading

international exchanges such as CME Group, London Metal Exchange (LME), Shanghai Futures

Exchange (SHFE) and Taiwan Futures Exchange (TAIFEX). The Exchange has also tied-up with

various trade bodies, corporate, educational institutions and R&D centers across the country.

These alliances enable the Exchange in improving trade practices, increasing awareness, and

facilitating overall improvement of commodity futures market.

Pattern on National Commodity & Derivatives Exchange (NCDEX):-

NCDEX is the second largest commodity exchange in the country after MCX. However the

major volume contributors on NCDEX are agricultural commodities. But, most of them have

common inherent problem of small market size, which is making them vulnerable to market


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manipulations and over speculation. About 60 percent trade on NCDEX comes from guar seed,

channa and Urad (narrow commodities as specified by FMC).

Pattern on National Multi Commodity Exchange (NMCE):-

NMCE is third national level futures exchange that has been largely trading in Agricultural

Commodities. Trade on NMCE had considerable proportion of commodities with big market size

as jute rubber etc. But, in subsequent period, the pattern has changed and slowly moved towards

commodities with small market size or narrow commodities.

Analysis of volume contributions on three major national commodity exchanges reveled the

following pattern,

Major volume contributors: - Majority of trade has been concentrated in few commodities that

are

Non Agricultural Commodities (bullion, metals and energy)

Agricultural commodities with small market size (or narrow commodities) like guar, Urad,

Menthol etc.

As of March 2012, futures trading in urad, tur and rice remain suspended.

During the period under review (January 2013 to March 2013), the total value of trade in all

commodities traded at the recognized Exchanges was `40.84 lakh crore as against `41.99 lakh

crore during the previous quarter (October 2012 to December 2012) and `44.03 lakh crore during

the corresponding period of last year.

The five major commodity exchanges contributed 99.63 % to the total value of trade in the

Commodity futures market. These are MCX, Mumbai (88.31 %), NCDEX, Mumbai (7.15 %),

NMCE, Ahmedabad (1.52 %), ICEX, Mumbai (1.83 %), and ACE Derivatives and Commodity

Exchange Ltd., Mumbai (0.82%).

Table 1.3 Total volume and value of trade during the quarter (January 2013 to March 2013) in

the major commodity exchanges

Name of Exchange

Volume of Value (` in % share (In

Trade

Crore)

value

(In lakh tons) terms)


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Multi Commodity Exchange of India 2284.77 3606867.16 88.31

Ltd., Mumbai

National Commodity & Derivatives 678.79 292014.68 7.15

Exchange Ltd., Mumbai

National Multi Commodity Exchange 84.21 61967.85 1.52

of India Ltd., Ahmedabad

Indian Commodity Exchange Ltd., 136.08 75131.51 1.83

Mumbai

ACE Derivatives & Commodity 56.20 33428.45 0.82

Exchange Ltd., Mumbai

Total of top 5 exchanges 3240.05 4069409.65 99.63

Others 32.24 14982.82 0.37

Grand total 3272.29 4084392.47 100.00

Note: Natural Gas volumes are not included in the Total Volume

During the period under review Silver, Gold, Crude Oil, Copper, Natural Gas, Lead, Zinc &

Nickel contracts constituted a major share of the value of commodities traded at the MCX,

Mumbai. The following table indicates the % share of major commodities traded at MCX,

Mumbai, during the period under review.

Table 1.4 Top commodities traded on MCX during the quarter (January 2013 to March 2013)


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Commodities Total value

% share to the total value

(In ` crores)

SILVER 936279.660 25.96

GOLD 906262.427 25.13

CRUDEOIL 653661.839 18.12

COPPER 293087.998 8.13

NATURAL GAS 221621.380 6.14

LEAD 212341.570 5.89

ZINC 137550.888 3.81

NICKEL 101419.834 2.81

Total of major commodities 3462225.596 95.99

Other commodities 144641.563 4.01

Total 3606867.158 100.00


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41

During the period under review Soy Oil, Soya Bean, Castor Seed, Dhaniya, R/M Seed,

Chana, Cotton Seed Oil Cake, Kapas, Jeera & Turmeric constituted a major share of the

value of commodities traded at the NCDEX, Mumbai.The following table indicates the %

share of major commodities traded at NCDEX, Mumbai during the period under review.

Table 1.5 Top commodities traded on NCDEX during the quarter (January 2013 to March

2013)

Commodities Total value % share to the total value

(In `crores)

SOYA_OIL 101121.123 4.63

SOYABEAN 39302.174 13.46

CASTOR_SEED 24150.850 .27

DHANIYA 22826.798 7.82

R/M SEED 17693.340 .06

CHANA 16396.567 5.61

COTTON_CAKE 15867.319 5.43

KAPAS 13025.696 .46

JEERA 10493.146 .59

TURMERIC 10022.351 .43

Total of major commodities270899.364 2.769


Total 292014.684 100.00


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42

During the period under review Raw Jute, coffee Rep Bulk, Nickel, copper and Lead

constituted a major share of the value of commodities traded at the NMCE, Ahmedabad.

The following table indicates the % share of major commodities traded at NMCE,

Ahmedabad during the period under review.

Table 1.6 Top commodities traded on NMCE during the quarter (January 2013 to March

2013)

Commodities Total Value in `Crore

% share to the

total value

RAW JUTE 5992.41 9.67

COFFEE REP BULK 5633.35 9.09

NICKEL 4223.85 6.82

COPPER 4236.62 6.84

LEAD 4150.76 6.70

Total of Major

Commodities 24236.99 39.11

Others Commodities 37730.86 60.89

Total 61967.851 100.00


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43

During the period under review Natural Gas, Crude Oil, Silver, Copper, Iron ore, Lead, &

Gold constituted a major share of the value of commodities traded at the ICEX, Mumbai.

The following table indicates the % share of major commodities traded at ICEX, Mumbai

during the period under review.

Table 1.7 Top commodities traded on ICEX during the quarter (January 2013 to March

2013)

Commodities Total value

% share to the total value

(In ` crores)

NATURAL GAS 29145.559 38.79

CRUDEOIL 12037.273 16.02

SILVER 8992.213 11.97

COPPERCATHODE 8785.815 11.69

IRONORE62FINES 7554.096 10.05

LEAD 5977.320 7.96

GOLD 2625.347 3.49

Total of major

commodities 75117.621 99.98


Total 75131.504 100.00

Note: Natural Gas volumes are not included in the Total Volume


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44

During the period under review Soy Oil, RBD, Soya Meal & Cotton constituted a major

share of the value of commodities traded at the ACE, Mumbai. The following table

indicates the % share of major commodities traded at ACE, Mumbai during the period

under review.

Table 1.8 Top commodities traded on ACE during the quarter (January 2013 to March

2013)

Commodities

Total value % share to the total

(In `crores) Value

REFSOYOIL 23916.861 71.55

RBD 2905.998 8.69

SOYMEAL 2499.456 7.48

COTTON118 2455.443 7.35

Total of major31777.758 95.06

commodities


Total 33428.448 100.00


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Chapter 2: Literature Review


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(UNCTAD,5 June 2011) ,The major findings in this article was laid on the functioning

of commodity markets and the flow of information that affect the trading decisions. The

paper also summarizes the recent developments and trends in fundaments on both the

demand and supply side. They have urged that due to increase in the number of investors

in commodity market who do not base their trading purely on the basis of demand and

supply has lead to misleading price signals in the market . Another finding in this paper

was that investors want to diversify their portfolio which is playing an important role for

them to invest in commodity market rather than understanding the fundamentals for

investment.

(Ke Tang and Wei Xiong, March 2011),The primary objective of this paper was to find

out the effect growing investment in commodity futures markets has had on commodity

price co-movements. In order to find out the relationship between the two the authors

conducted a regression test between the oil and selected commodities from various

sectors and the major finding was that with the increase in investment by investors

observed since the early 2000s futures prices of non-energy commodities have become

increasingly correlated with oil.

(John Baffes and Tassos Haniotis ,July 2010),The main objective of this paper was to

analyze three potentially key factors behind recent commodity price increases: excess

liquidity and speculation, increasing food demand by emerging economies and the use of

some food commodities for biofuel production. The major findings in this paper was

speculation played a key role during the 2008 price rise whereas the use of some food

commodities for biofuel production played a small role and the increase in food demand

by emerging economies played no noticeable role.

(Lutz Kilian and Dan Murphy, 16 March 2010), The main objective of this study was

to develop a structural vector autoregressive (VAR) model of the global oil market. The

major findings of this study was that the increase in oil prices observed from 2003 to

2008 was caused by fluctuations in the flow demand for oil driven by the global business

cycle. The model also suggests that speculative trading played an important role during

oil price shocks observed in 1979, 1986 and 1990.


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(Christopher Gilbert, March 2010),Main purpose of this study was to quantify the

effect of bubble behavior, possibly resulting from extrapolative expectations and

index-based investment on commodity futures prices between 2006 and 2000.The

findings of this study was that both bubble behavior and index investments have had a

substantial impact on commodity futures prices.

(Jeffrey Currie, Allison Nathan, David Greely and Damien Courvalin, 30 March

2010) ,The major findings of this study was that commodity price movements can be

explained by increasing marginal costs in the long term and fluctuations in inventories in

the short term. The authors also find speculative investors contributed to increased price

levels and price volatility in recent years noting as speculators buy, prices generally tend

to rise, and vice versa. Also the author points out that there is close relationship between

price volatility, inventories and storage capacity, as inventories help in closing the gap

between physical supply and demand.

(Scott Irwin and Dwight Sanders, 2010),The paper aims to test whether the major

growth in index funds has increased price volatility in both agricultural and energy

markets and, in particular, whether they helped cause a commodity price bubble in 2006-

08.The findings of this study was that there were no strong evidence that index funds

caused a price bubble in commodity futures markets. The authors also find increasing

index fund positions are consistently associated with declining price volatility and this

paper gives a reasonable explanation for this negative correlation arguing speculation

helps to provide sufficient liquidity for hedging needs.

(International Monetary Fund, October 2008),The basic output of this study was that

strong demand from emerging economies, low capacity, low inventories resulting in slow

supply responses and the interaction between these factors have been the primary causes

of the surge in commodity prices observed in the first half of 2008. In addition, demand

for biofuel, supply disruptions and trade restrictions have caused food prices to surge

even higher. The authors also note that this price momentum may have been reinforced

by increased cross-commodity price linkages.


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(Dwight Sanders, Scott Irwin and Robert Merrin, 1 January 2010), Under this study

the author brings out two important findings in agriculture futures market since 1995,

firstly a rapid increase in open interest since late 2004 and a stabilization of index funds

percentage of open interest since 2006.

(Gary Gorton and K. Geert Rouwenhorst ,March/April 2006),This paper concludes

that commodity futures returns have provided effective diversification for stock and

bond portfolios. Commodity futures have offered the same return and risk premium as

equities over the study period and are negatively correlated with equity and bond returns

due to different behavior over the business cycle and positively correlated with inflation,

unexpected inflation and changes in expected inflation.


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CHAPTER 3: RESEARCH METHODOLOGY


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1. Objectives of research:

To study the behavior of the individuals, their perspective, investment preference

for commodity market trading in India as compared to other financial markets in

India.

To study the operation and functioning of commodity market.

2. Research Design: Exploratory design has been selected as data has been collected from

the secondary sources inorder to understand the functioning of commodity market and

data has been collected from primary source inorder to satisfy the research objectives.

3. Data Collection Method: Most of the data has collected from secondary sources

whereas for conduct of research the primary data has been collected through a structured

questionnaire wherein a total of 130 respondents took part out of which only 100 have

been taken into consideration as the questionnaire pertains to a specific class of

respondents, so inorder to reduce the error this has been done. A total of 63 males and 37

females have been include in the research.

4. Sampling: The study mainly deals with the financial behavior of Individual Investors

towards Commodity market in India. The required data was collected through a pretested

questionnaire administered on a combination of convenience andjudgment sample of

100 individual investors. Judgment sample selection isdue to the time. Respondents were

screened and inclusion was purely on the basis of their knowledge about Financial

Markets, Commodity market in particular. This was necessary, because the questionnaire

presumed awareness of some basic terminology about Commodity market. The purpose

of the survey was to understand the behavioral aspects of individual investors, mainlytheir fund selection behavior, various factors influencing this behavior and also the

conceptual awareness level among individual investors. Sample of the questionnaire is

given in Annex. A.


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5. Instruments used: The primary data was collected through a structured questionnaire by

one to one interactions with investors and contact was also made through emails.

6. Analysis and Interpretations: The analysis of the data collected has been performed

appropriately and inferences have been drawn. The techniques that are used for analysis

of data are Descriptive technique, Crosstabs and Annova which have been performed by

the use of SPSS software.

7. Limitations of the study:

Sample size is limited to 100 educated individual investors. The sample size may not

adequately represent the national market.

Simple Random and judgment sampling techniques is due to time constraints.

This study has not been conducted over an extended period of time having both ups and

downs of stock market conditions which a significant influence on investor s buying

pattern and preferences.

The research is only exploratory, no conclusion may finally be drawn from it, but only

direction may be sought.

This is an independent study and the observations may not comply with those which have

been made by an experienced professional.


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CHAPTER 4: Analysis and Interpretation


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1) Analysis of investors preferences

The survey was conducted to capture investor objective for investment in financial instruments, revealsthe following.

Graph 4.1

Most of the investors want to invest money for the purpose of future welfare followed by high growth, so

company should suggest those instruments which have a positive return for their investment which will

help in fulfilling both the objectives.

2)Current investors preference of Individual Investors towards the Following Financial Markets, In the

Indian Capital Market

Graph 4.2

25

17

63

75

10

22

66

0 10 20 30 40 50 60 70 80

High income

Stable income

Reasonable income and safety

Future welfare

Retirement protection

Tax benefits

High growth

FREQUENCY


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From the above analysis we can infer that majority of the people invest in Equity market, while the

investment in Commodity market and Mutual funds are almost similar, so therefore investors are inclined

more towards the share market.

3) Current Attitude of Individual Investors towards the Following Financial Markets, In the Indian

Capital Market

Graph 4.3

9084

15

3

79

0

20

40

60

80

100

Equity

market

Commodity

market

Currency

market

Real estate Mutual funds

Frequency


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According to the analysis, we can see that most of the investors are favorable towards Mutual fund under

current market scenario followed by Commodity market and somewhat favorable towards Equity market.

So, it can be said that investors are looking for safe investment options along with safe return which can

be used as a motivation factor for investors to lure them in investing in commodity market. According to

the recent reports commodity market are the first to revive for current situation which add as an added

incentive for investors to invest in this market as returns are going to be favorable.

123

66

9 1

5 61

21

121

0 3

18

78

1

08

2461

7

679

131

1

Highly favourable Favourable Somewhat favourable Not very favourable Not at all favourable

Chart Title

Equity Commodity Currency Real estate Mutual fund


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4) Preference of investors investing in Commodity market

Graph 4.4

From the above analysis we can clearly identify that Bullions i.e. Gold and Silver are the most favored

commodities to be traded in followed by Energy products such as Crude oil, Petroleum.

5)Index preference of investors

Graph 4.5

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Summer Internship Project Report on commodity market in India

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