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Investing Commodities in India

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Change has been the order of the day and stock markets in India have been no exception. From trading in the open to sitting in the comforts of homes, trading has come a long way and so have commodities we trade for.

In India there are 25 recognised future exchanges, of which there are three national level multi-commodity exchanges. After a gap of almost three decades, Government of India 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 Exchange Limited (NCDEX)

Multi Commodity Exchange of India Limited (MCX)

National Multi-Commodity Exchange of India Limited (NMCEIL) All the exchanges have been set up under overall control of Forward Market Commission(FMC) of Government of India.

National Commodity & Derivatives Exchange Limited (NCDEX) located in Mumbai is the only commodity exchange in the country promoted by national level institutions. It is promoted by ICICI Bank Limited, Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE).It is a professionally managed online multi commodity exchange.

Headquartered in Mumbai Multi Commodity Exchange of India Limited (MCX), is an independent and de-mutualised exchange with a permanent recognition from Government of India. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, Union Bank of India, Corporation Bank, Bank of India and Canara Bank. MCX facilitates online trading, clearing and settlement operations for commodity futures markets across the country.

MCX started offering trade in November 2003 and has built strategic alliances with Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors' Association of India, Pulses Importers Association and Shetkari Sanghatana.

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 the Government to organise trading in the edible oil complex. It is being supported by Central Warehousing Corporation Ltd., Gujarat State Agricultural Marketing Board and Neptune Overseas Limited. It got its recognition in October 2002.

What is more, there are other players who are changing the game. Take for example KEDIA COMMODITY (KEDIA), which is a full-fledged financial services organization, focused on providing varied financial services to its client sunder a single roof.

(KEDIA) Commodity is a member of Multi Commodity Exchange India LTD, National Commodity Derivatives Exchanges Exchange Ltd as well as National Spot Exchange LTD and offers services in the commodity market.

Commodity exchange in India plays an important role where the prices of any commodity are not fixed, in an organised  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 grass roots level. It brings a price transparency and risk management in the vital market.

Players of commodities market have been classified into three broad categories. They are Hedgers, Speculators and Arbitrageurs.

Hedgers: Hedging is an investment strategy used for minimising a risk and hedgers are the practitioners of this strategy. Generally, hedgers are producers or consumers who want to transfer the price-risk on to the market.

Commodities derivatives market provides them an effective hedging mechanism against adverse price movements. They protect themselves from risk associated with the price of commodity by using derivatives.

Speculators: Speculators are sophisticated leading players in commodities futures market. They are basically risk takers and are never associated with any commodity. They generally bet against the price movement in the hope of making gains.

They undertake speculative position with respect to anticipating future price movements with a small margin and square-off anytime during trading hours. They do either by going long or going short positions.

Buying a futures contract in anticipation of price increase is known as going long". Selling a futures contract in anticipation of a price decrease is known as going short".

Arbitrageurs: Arbitrageurs are investors who earn from discrepancy in prices between the two exchanges or between different maturities of the same commodity.

A simple example of arbitraging is simultaneously buying gold at lower price from one exchange and selling it on another exchange for higher price. So they make profit from price difference.

Indian markets have thrown open a new avenue for retail investors and traders to participate in commodity derivatives. For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities are the best option.

Till some time ago, this wouldn't have made sense. For retail investors could have done very little to actually invest in commodities such as gold and silver – or oilseeds in the futures market. This was nearly impossible in commodities except for gold and silver as there was practically no retail avenue for punting in commodities.

However, with the setting up of three multi-commodity exchanges in the country, retail investors can now trade in commodity futures without having physical stocks! Commodities actually offer immense potential to be come a separate asset class for market-savvy investors, arbitrageurs and speculators. 

Happy Investing!!

 

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