Impact of Foreign Players in the Commodity Markets in India

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Executive Summary

India is an agriculture based country having a long history of commodity trading dated back to 1875.Commodity derivatives have a crucial role to play in the price risk management process especially in an agriculture dominated economy. So, it is largely the agricultural commodities that are traded on the existing commodity derivatives markets in India. This is also in line with the requirement of WTO to reduce the support to agriculture. . The share of non-agricultural commodities, like metals – particularly bullion – is also growing rapidly in the near future .However in the past, during the year 1960; the Indian Government imposed a ban on most of the commodities, except very minor commodities like pepper and turmeric. The apprehensions about the role of speculation, particularly in the conditions of scarcity, prompted the Government to continue the prohibition till 2003. Traditionally commodity markets in India are regional mandis or unorganized markets indulged in spot trading. They are isolated and fragmented and are mostly restricted in terms of inter-state movement and warehousing of commodities but are now moving towards organization with the formation of FMC and establishment of the exchanges under its purview. The three national commodity exchanges are the NCDEX, the MCX and the NMCE which make the futures contracts available across the nation in the most cost effective manner through technology. Now the government is also contemplating on the allowance of foreign funds into the commodity market. Our paper discusses this issue in detail by identifying the pros and consequences. We have first identified the basic definition of hedge fund and its characteristics while operating in the commodity market .The similarities between hedge fund and mutual fund are also discussed. In India, the main rationale behind the commodity market was to provide a hedging option to the consumers or farmers against the future price variations due to...
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