Commodity Market in India

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  • Topic: Futures contract, Chicago Board of Trade, Commodity market
  • Pages : 26 (9136 words )
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  • Published : September 8, 2008
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1. Commodity and Commodities market
1.1 INTRODUCTION
India, a commodity based economy where two-third of the one billion population depends on agricultural commodities, surprisingly has an under developed commodity market. Unlike the physical market, futures markets trades in commodity are largely used as risk management (hedging) mechanism on either physical commodity itself or open positions in commodity stock. For instance, a jeweller can hedge his inventory against perceived short-term downturn in gold prices by going short in the future markets. The article aims at knowhow of the commodities market and how the commodities traded on the exchange. The idea is to understand the importance of commodity derivatives and learn about the market from Indian point of view. In fact it was one of the most vibrant markets till early 70s. Its development and growth was shunted due to numerous restrictions earlier. Now, with most of these restrictions being removed, there is tremendous potential for growth of this market in the country. 1.2 COMMODITY

A commodity may be defined as an article, a product or material that is bought and sold. It can be classified as every kind of movable property, except Actionable Claims, Money & Securities. Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets, may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. 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 (and dependent) industries constitute about 58 per cent. Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the size of the commodities market grows many folds here on. 1.3 COMMODITY MARKET

Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market. Table: 1

Turnover in Financial Markets and Commodity Market
(Rs in Crores)
S No.Market segments 2002-03 2003-04 2004-05 (E)
1Government Securities Market 1,544,376(63)2,518,322(91.2)2,827,872(91) 2Forex Market 658,035(27)2,318,531(84)3,867,936(124.4) 3Total Stock Market Turnover (I+ II) 1,374,405(56)3,745,507(136)4,160,702(133.8) I National Stock Exchange (a+b) 1,057,854(43)3,230,002(117)3,641,672(117.1) a)Cash 617,989 1,099,534 1,147,027

b)Derivatives 439,865 2,130,468 2,494,645
II Bombay Stock Exchange (a+b) 316,551(13)515,505(18.7)519,030(16.7) a)Cash314,073 503,053 499,503
b)Derivatives2,478 12,452 19,527
4Commodities Market NA 130,215(4.7)500,000(16.1)
Note: Fig. in bracket represents percentage to GDP at market prices Source: Sebi bulletin

1.4 Its EVOLUTION IN INDIA
Bombay Cotton Trade Association Ltd., set up in 1875, was the first organized futures market. Bombay Cotton Exchange Ltd. was established in 1893 following the widespread discontent amongst leading cotton mill owners and merchants over functioning of Bombay Cotton Trade...
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