challenges to commodity markets in india.pptx
TRANSCRIPT
Challenges To Commodity Markets In
India
Definition
Commodity – As Asset Class
Commodity – Uniqueness
Classification of Commodities
Indian Commodity Market Size
Performance of Indian Commodity Market
History of commodity 2
Interventions by Govt.
FC(R) A ,1952
Evolution of FMC
Kabra committee report
Challenges faced by commodity markets presently
Legal Challenges
Regulatory challenges
Infrastructural challenges
Awareness amongst investors and farmers
Other Challenges
Suggested measures for smooth operations of commodity markets
Index
1
Commodities – in Real LifeWheat in your bread
Petrol in your vehicle
Coffee on your table
Sugar in your sweets
Chana in your chhole
Gold in your necklace
……… and so on …….
Commodities are everywhere
2
Characteristics Commodity is anything movable (a good) that has
following characteristics Fungible, i.e. the same no matter who produces it Derivatives, i.e. involves further processing into number
of products Economic cost, i.e. production of it involves some cost
A commodity is any good or service produced by human labour and offered as a product for general sale on the market - Karl Max
3
In financial parlance, assets are economic resources that is capable of being owned or controlled to produce value
Commodity too has gained importance currently as independent asset class
Commodity, being the natural goods are independent of other asset classes
Assets Classes
Equities : Performer during economic expansion & an out performer over very long term…
Fixed Income : Performs at the later stage of recession…
Real Estate : Performs during early expansion…
Commodities : Performance spread evenly over the economic cycle…
Commodity – As Asset Class
4
1. Seasonality A major force in the commodities markets
2. Correlation Unlike other asset class, commodities
are positively and negatively correlated within & outside the group which is
unique to commodities only
3. Weather No other asset class are so much influenced by weather patterns
4. Hedge Provides natural hedge against war, inflation, other asset portfolios, recession etc. example -GOLD
Commodity – Unique points of diversification
5
Commodity – PerformanceCommodity – PerformanceReturns Over Different Asset Classes in 4 Yrs.
69.5173.72 75.95
88.46
31.55
-1.44-10
0
10
20
30
40
50
60
70
80
90
100
SENSEX NIFTY CNX 500 NCDEXAGRI INDEX
INR MCXMETALINDEXSource:Bloomberg,Way2Wealth Research
6
Commodity – Performance
Various Asset Classes Performance
60
80
100
120
140
160
180
200
220
240
260
Oct-05 May-06 Dec-06 Jul-07 Feb-08 Sep-08 Apr-09 Nov-09
NCDEX Ag Index Nifty USDINR MCX Metal Index
7
Contribution in global landscape
Indian Share in Global Commodity Market
91%
9%
Global India
Global Vs. India
Global commodity has relatively long history Size is 9 times larger than India
India
Commodity futures, though active since 19th century was banned later in 1970’s
Commodity volumes shoots up significantly after re-launch in 2003
MCX emerged as world’s Sixth largest exchange
Volumes on Indian exchanges are increasing at CAGR of 73.7 percent
2009 2008Global 14831317 11712611India 1469673 1067984
Commodity Trading ( Value in Million USD)
8
Classification of Commodities
9
Commodity – Indian Structure
20 Other Regional ExchangesNMCE
Commodity Exchanges
MCX
National Exchanges Regional Exchanges
FMC – The Regulator
NBOTNCDEX
Leadership position with >90% share
10
Indian Growth so far
0
100
200
300
400
500
600
700
2004 2005 2006 2007 2008 2009 2010MCX NCDEX TOTAL
Source:FMC,Way2Wealth Research
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10Bullion and other metals 31.5 36.1 57.9 64.6 56.7 40.8Other than bullion metals
- - - -- 23.2
Agriculture 68.2 55.3 35.8 23.1 11.9 15.7Energy 0.3 8.4 6.3 12.3
-20.3
Others 0.0 0.1 0.0 0.0 31.4 0.0Source:FMC,Way2Wealth Research
Segment wise % Share of Commodities
* 2008-09 other segment includes energy& other metals
Significant rise in volume since launch of exchanges in 2003
MCX Leader in Metals & Energy
NCDEX Leader in Agri
> 65% CAGR Growth
Volume Growth in Indian Exchanges
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Indian Growth during 2004-09
India Commodity Wise Market Share in 2004
17%
15%
1%0%67%
0%
Gold Silver Crdue oil Copper Total agri Others
India Commodity Wise Market Share in 2009
31%
15%20%
13%
12%
9%
Gold Silver Crdue oil Copper Total agri Others
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Returns in Indian commoditiesReturns Across Various Commodities in 5 Yrs.
92.8662.54
3.83
-12.36-45.21
9.25
87.12
22.25 4.96 9.6551.16
142.80
94.21
485.86
23.60
-100
0
100
200
300
400
500
600G
old
Silv
er
Cru
de o
il
Copper
Zin
c
Alu
min
ium
Lead
Guar
Seed
Guar
Gum
Soy O
il
Soybean
Pepper
Jeera
Turm
eric
Menth
a O
il
Source:Bloomberg,Way2Wealth Research
Almost 45 commodities are available for trading in both NCDEX & MCX Though few have been de-listed during high inflation times, re-listing also has happened Bullion, Base metals, energy & Agri are the major contributors in terms of volumes
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History of commodity trading in India
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1875- Establishment of Bombay Cotton Trade Association
1893- Establishment of Bombay Cotton Exchange Ltd.
1912-Future trading in raw jute and jute goods began in Calcutta1913-Wheat markets in Hapur began functioning1919-Calcutta Hessian Exchange
1926- Seed Traders Association Ltd started in Bombay1927- East Indian Jute Association
Amalgamation of Calcutta Hessian Exchange and East Indian Jute Association
1936- Commodity Exchange Act was passed
1939-Ban on markets due to WWII1964- Futures trading in raw jute suspended
1974- Amendment in Commodity Exchange Act
2003- Reintroducing future trading by government
2008- Ban on four commodities
The Timeline of commodity Trading in India
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The criteria to assess the success or failure of any government intervention:-
Objective of interventionAlternative tools available for achieving the objectivesSuccess of the intervention in achieving the objectiveCost (risks, unintended side effects) of intervention
Intervention by Government
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Development was constrained Ban on cotton, food grains, spices and sugar Wagons only used for military transport as a
result it caused shortages in essential commodities
Rampant hoarding Futures trading was halted Food grains, jute and oilseeds were banned
under Defence of India rules.
The onset of WWII and growing intervention by Govt
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Enables the authority to take appropriate actions that may be considered desirable.
The act prohibits option trading in all commodities.
Empowers the govt to ban forward contracts in a particular contracts in a particular commodity by a notification.
Non-transferable specific delivery contracts are ordinarily exempted from regulation.
Empowers the central govt to call for periodical returns,annual returns of any other information.
Provides penalties against persons who contravene the provisions of the act and the qualifications thereof.
Provides for the regulation of the Forwards markets through the governing bodies of recognized associations.
Empowers the central government to supersede the governing body of recognized associations and the order it to suspect its business.
Empowers the central government to appoint not more than four members on the governing bodies who may act against public interest in the form of FMC.
Forwards Contracts (Regulation) Act, 1952
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The parliament passed Forward Contracts (Regulation) Act,1952
The Act envisages 3-tier regulationo The exchange which organizes forward trading in commodities can
regulate trading on a day-to-day basis.o The Forward Market Commission provides regulatory oversight under
the powers delegated to it by the central government ando The central government, Department of consumer affairs, Food and
Public distribution is the ultimate regulatory authority.
In 1960's following severe draughts that forced many farmers to default on forward contracts and even caused some suicides. Forward trading was banned in many commodities considered primary or essential.
Evolution of Forward Market Commission after Independence
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Government set up a committee in 1993 to examine the role of future trading.
The Kabra committee recommended allowing futures trading in 17 commodities groups
The committee recommended certain amendments to forward contracts (Regulations) Act 1952, particularly allowing option trading in goods and registration of brokers with FMC.
Policy Shift- Kabra Committee
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The government accepted most of these recommendations and futures trading was permitted in all recommended commodities
Derivatives do perform a role in risk management led the government to change its stance.
Liberalization facilitates market forces to act freely
The next decade is being touted as the decade of commodities
After Effects of Kabra Committee
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Potential market growth loss due to regulatory uncertainty
Loss of turnover for brokerage houses and hedgers
Absence of information future price for govt to plan procurement
price volatility
Consequences
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Transforms the role of FMC to an independent regulator (similar to SEBI). Allows trading in all commodity derivatives and also options on goods and
commodity derivatives. Makes a provision for corporatisation and demutualisation of all recognised
associations to be approved by the FMC. At present ready delivery contracts need to be delivered and paid for immediately or
within 11 days. The bill extends this period to 30 days. The number of members of the FMC has been increased from 4 to 9 including one
chairman and 3 whole time members. the bill vests powers in the FMC to impose penalties in cases of failure to furnish
information or comply with the directions of the commissions indulging in insider trading or fraudulent and unfair trade practices and in case of contravention of the provisions of the FCRA 1952.
The bill makes a provision for the transfer of duties and functions presently performed by a clearing house to a clearing corporation.
The Central Government would have the power to issue direction to the FMC on matters of policy and to supersede it in certain cases.
Forward Contracts (Regulation) Act Amendments
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Legal challengesRegulatory challengesInfrastructural challengesAwareness among investors and producersOther challenges regarding trading
Challenges faced by commodity markets presently
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Amendment in FCRA Amendment in Banking regulations actEssential commodities act
Legal Challenges
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Inadequate regulation by FMCAnalyzing the adequacy of powers of FMCDeficiencies in the existing pattern
• Organizational• Functional• Operational
Regulatory challenges
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The FMC needs to operate under a regulatory framework that enables it to:
Protect market integrity. To preserve the economic functions of the
commodity markets to shift commercial price risk and aid in price discovery.
Ensure market fairness. Ensure financial safety and soundness by
guarding against systemic risk.
Forward Market Commission
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Warehousing and standardization facilities Physical deliveries need back up Cah versus physical settlement Clearing house Modern trading rings
Infrastructural challenges
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Lack of awareness among investors and farmers lead to losses to them for which seminars and mock trading sessions should be arranged
Awareness Among Investors and Producers
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Size of contracts too big for small traders and producers
Mutual funds and FIIs should be allowed to trade on exchanges
Farmers not beneficiaries in price riseLack of economies of scaleIndoctrination is ineffectiveIssues on warehouse receipts
Other Challenges Regarding Trading
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Commodity exchanges and brokerage houses should be hosting seminar on commodity market awareness.
Conducting mock trading, to providing commodity-specific training on the functioning of the exchange.
Commodity market education should be provided through other media such as educational CDs and cartoon books in order to reach out to more people.
Size of contracts should be split. Introduction of modern warehouse and clearing house
infrastructure. Giving the FMC the status and power similar to SEBI by
passing the FC (R) A Amendment bill.
Suggested Measures for Smooth Operations of Commodity Markets
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