Commodity Market of India

Only available on StudyMode
  • Topic: Futures contract, Commodity market, Chicago Board of Trade
  • Pages : 28 (8817 words )
  • Download(s) : 703
  • Published : January 3, 2011
Open Document
Text Preview

Derivatives as a tool for managing risk first originated in the commodities markets. They were then found useful as a hedging tool in financial markets as well. In India, trading in commodity futures has been in existence from the nineteenth century with organised trading in cotton through the establishment of Cotton Trade Association in 1875. Over a period of time, other commodities were permitted to be traded in futures exchanges. Regulatory constraints in 1960s resulted in virtual dismantling of the commodities future markets. It is only in the last decade that commodity future exchanges have been actively encouraged. However, the markets have been thin with poor liquidity and have not grown to any significant level.

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.

Evolution of the commodity market in India

Although India has a long history of trade in commodity derivatives, this segment remained underdeveloped due to government intervention in many commodity markets to control prices. The production, supply and distribution of many agricultural commodities are still governed by the state and forwards and futures trading are selectively introduced with stringent controls. While free trade in many commodity items is restricted under the Essential Commodities Act (ECA), 1955, forward and futures contracts are limited to certain commodity items under the Forward Contracts (Regulation) Act (FCRA), 1952.

The first commodity exchange was set up in India by Bombay Cotton Trade Association Ltd., and formal organized futures trading started in cotton in 1875. Subsequently, many exchanges came up in different parts of the country for futures trade in various commodities. The Gujrati Vyapari Mandali came into existence in 1900 which has undertaken futures trade in oilseeds first time in the country. The Calcutta Hessian Exchange Ltd and East India Jute Association Ltd were set up in 1919 and 1927 respectively for futures trade in raw jute. In 1921, futures in cotton were organized in Mumbai under the auspices of East India Cotton Association (EICA). Many exchanges were set up in major agricultural centres in north India before world war broke out and they were mostly engaged in wheat futures until it was prohibited. The existing exchanges in Hapur, Muzaffarnagar, Meerut, Bhatinda, etc were established during this period. The futures trade in spices was first organized by India Pepper and Spices Trade Association (IPSTA) in Cochin in 1957. Futures in gold and silver began in Mumbai in 1920 and continued until it was prohibited by the government by mid-1950s. Options are though permitted now in stock market, they are not allowed in commodities. The commodity options were traded during the pre-independence period. Options on cotton were traded until they along with futures were banned in 1939 (Ministry of Food and Consumer Affairs, 1999). However, the government withdrew the ban on futures with passage of FCRA in 1952. The Act has provided for the establishment and constitution of Forward Markets Commission (FMC) for the purpose of exercising the regulatory powers assigned to it by the Act. Later, futures trade was altogether banned by the government in 1966 in order to have control on the movement of prices of many agricultural and essential commodities.

After the ban of futures trade all the exchanges went out of business and many traders started resorting to unofficial and informal trade in futures. On recommendation of the...
tracking img