25-08-2017, 09:32 PM
A study of Commodity Exchanges in India
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ABSTRACT
Commodity markets are markets where raw or primary products are exchanged. The first national level commodity exchange was introduced in 2003 and has seen a tremendous growth. In the last fiscal year ie 2011-12 the total turnover of the Indian commodity markets was approximately of Rs 173.69 lakh crore.
Currently, there are five national commodity exchanges and several regional exchanges in India. The growth in trading volumes has been primarily boosted by Multi Commodity Exchange (MCX) and National Commodity Exchange (NCDEX). These two exchanges account for a large share of the total number of contracts traded on all the exchanges in India.
In fact, the size of the commodities markets in India is also quite significant. Of the country's GDP of Rs 13,20,730 crore (Rs 13,207.3 billion), commodities related industries constitute about 58 per cent.
The National Multi Commodity Exchange (NMCE) was the first exchange to be granted permanent recognition by the Government, where futures trading commenced on 26 November, 2002 in 24 commodities. The Multi Commodity Exchange of India (MCX) was established in November 2003 and the National Commodity and Derivatives Exchange Limited (NCDEX) commenced operations in December 2003. Today, futures’ trading is permissible in 95 commodities in India. There are 25 recognised futures exchanges with more than 3000 registered members. Trading platforms can be accessed through 20,000 terminals spread over 800 towns/cities.
The volume of trade in the exchanges in 2011-12 was Rs.173.69 lakh crore, and an increase in 53.89% compared to last year, 98 per cent of which is accounted for by the four national exchanges.
The Reserve Bank of India has said that there is no conclusive evidence to show that futures trading in agri-commodities impacts their spot price or leads to food price inflation.
The conclusion is in consonance with the observation of the Abhijit Sen Committee, which was constituted in 2007 to study the effects of the futures trading on prices of agricultural commodities.
Using the so-called Granger causality tests to study whether prices in one market impact prices in the other, RBI has concluded that "commodity prices in India seem to be influenced more by other drivers of price changes, particularly demand-supply gap in specific commodities, the degree of dependence on imports and international movements in these commodities."
The RBI has carried out tests on six farm commodities — sugar, urad, tur, wheat, chana and potatoes — to find out whether futures trading impacted spot prices and vice-versa. The tests relate to monthly data on these commodities for the period of 2004-2009. For commodities such as urad and tur on which bans were imposed, data for the 2004-2007 period were used.
The causality tests show that futures prices have causal impact on spot prices in the case of sugar and urad and that spot prices impact futures prices in case of urad, chana, wheat and sugar.
"The emprical analysis, thus, does not provide any conclusive evidence in support of the relationship between spot and futures prices," noted RBI in its annual report for FY10.
"The RBI diagnosis reinforces what has been held all along by the futures market that futures prices do not cause spot price inflation and, hence, cannot be held responsible for food inflation in essential commodities," said Madan Sabnavis, chief economist, Care Ratings, and former chief economist of agri bourse NCDEX.
The government banned futures trading in tur, urad, wheat and rice in 2007. It relisted wheat in May 2009 but delisted sugar in the same month because of price volatility. The sugar ban comes up for review by the government on September 30.