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04 Aug 15 12:00 AM

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Commodity Market in India

A commodity may be defined as a product or material or any physical substance like food grains, processed products and agro-based products, metals or currencies, which investors can trade in the commodity market. One of the characteristics of a commodity is that its price is determined as a function of its market as a whole. Well-established physical commodities are actively traded in spot and derivative commodity market. Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitragers and speculators. Retail investors, who claim to understand the equity market, may find commodity market quite tricky. 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 commodity market before taking a leap. Historically, prices of commodities have remained extremely volatile.

The gradual evolution of commodity market in India has been of great significance for the country's economic prosperity. The commodity futures exchanges were evolved in 1800 with the sole objective of meeting the demand of exchangeable contracts for trading agricultural commodities. For example, the cotton exchange located at Cotton Green in Mumbai (then Bombay) was the one of the first organised commodity market in the country.

A commodity market is a market where various commodities and derivatives products are traded. Most commodity market across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts based on them. These contracts can include spot prices, forwards, futures and options on futures. Other sophisticated products may include interest rates, environmental instruments, swaps, or ocean freight contracts.

Commodities exchanges usually trade futures contracts on commodities, such as trading contracts to receive a particular commodity in physical form. Speculators and investors also buy and sell the futures contracts at commodity exchanges to make a profit and provide liquidity to the system.

The Indian commodity market offers a variety of products like rice, wheat, coal, petroleum, kerosene, gasoline; metals like copper, gold, silver, aluminum and many more. There are some commodities such as sugar, cocoa, and coffee, which are perishable, so cannot be stocked for long time. These days, a wide range of agricultural products, energy products, perishable commodities and metals can be sold under standardised contracts on futures exchanges prevailing across the globe. Commodities have gained importance with the development of commodity futures indexes along with the mobilisation of more resources in the commodity market.

India has around 25 recognised commodity future exchanges including three national-level commodity exchanges. They are:
  1. National Commodity & Derivatives Exchange Limited (NCDEX)
  2. Multi Commodity Exchange of India Limited (MCX)
  3. National Multi-Commodity Exchange of India Limited (NMCE) All these exchanges are under the control of the Forward Market Commission (FMC) of Government of India.

National Commodity & Derivatives Exchange Limited (NCDEX) located in Mumbai is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956 and commenced its operations on December 15, 2003.This is the only commodity exchange in the country promoted by national level institutions like 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 India). It is a professionally managed online multi-commodity exchange. It is a technology driven de-mutualised on-line commodity exchange with an independent Board of Directors and professional management.

Multi Commodity Exchange of India Limited (MCX) in Mumbai, is also an independent and de-mutualised exchange recognized by the Government of India. This commodity exchange which started operations in November 2003 has above 40 commodities on its platform and has a market share of around 80% in the Indian commodity market. 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. This commodity exchange facilitates online trading, clearing and settlement operations for commodity futures market across the country.

National Multi Commodity Exchange of India Limited (NMCE) is the first de-mutualized, Electronic Multi-Commodity Exchange to be formed in India. On 25th July, 2001, it was granted approval by the Government of India to organise trading in the edible oil complex. It started operating in the commodity market from November 26, 2002. NMCE is the only Exchange in India to have investment and technical support from commodity relevant institutions like Central Warehousing Corporation Ltd., Gujarat State Agricultural Marketing Board, Neptune Overseas Ltd, National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Ltd. (GAICL), Gujarat State Agricultural Marketing Board (GSAMB) and the National Institute of Agricultural Marketing (NIAM).

As compared to other markets in the last ten years, commodity market has performed relatively better than other markets like bonds , equity or currency. However, the participation in future trading in Indian commodity market is very low as compared to other countries as there is lack of knowledge about this market to the investors and traders. It is not for mere trading purpose; commodity trading is also used for hedge against inflation, price discovery of the commodity and also as a sound investment.

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