Financial Daily from THE HINDU group of publications
Thursday, Apr 20, 2006

Cross Currency

Group Sites

Opinion - Editorial

Futures, not perfect commodity yet

The commodities futures market must be set on a healthy, transparent growth path that advances the interests of the stakeholders.

Commodity futures trading is going places. Trading volumes are reaching ever higher peaks, not imagined even by the incurable optimist until recently. Integration of the domestic market with the international set-up has heightened the risk perception but, then, opportunities have opened up for risk management and profiting. Indeed, commodities are slowly but surely emerging as an asset class. The commodity market is now competing with securities, forex, bond and real-estate markets in attracting investible funds. Though from a low base, the phenomenal growth in volumes of the derivatives trade has already made the world sit up and take notice. Tie-ups and MoUs between Indian nationwide online exchanges and overseas bourses are testimony to that. Also, it is heartening that some of the initiatives taken by the exchanges — for instance, in warehousing and strengthening of the spot market — are delivering real benefits to stakeholders.

Yet, concerns abound, and these flow not from the rising volume of business, but from its composition. Commodity futures exchanges, policymakers supportive of such trade, and players (read, speculators) may all be rubbing their hands in glee at the phenomenal expansion of commodity futures trading. According to the Forward Markets Commission, futures trading in commodities nearly quadrupled in the just concluded fiscal to an aggregate value of Rs 21,34,000 crore (approximately $500 billion), up from Rs 5,72,000 crore in 2004-05. Though some 90 commodities are traded in the three national and 21 regional or commodity-specific exchanges, the top five are gold and silver, guar seed, chana (gram) and urad (black matpe). Wheat and soyabean oil also attract considerable interest. Clearly, a significant part of the trade is speculation driven, with participation by hedgers largely limited or almost absent. This aberration needs to be addressed. Also, there are systemic uncertainties, for instance, of delivery mechanism, quality, and capture of correct settlement price on maturity of contract.

Even while feeling good about the soaring trade volumes, the market needs to pause and examine how each of the stakeholders in the commodity sector has been impacted in the last two years. Have important stakeholders — primary producers, processors, consumers and exporters, for instance — benefited and by how much? What can be done to attract genuine hedgers whose benefit is the primary objective of futures trading? Are traders migrating from the cash market to become speculators with no genuine interest in the underlying commodity? It is time the regulator made a comprehensive review of the commodities futures market and set it on a healthy, transparent growth path that advances the interests of important stakeholders.

Related Stories:
Global commodities profile rising
Bright prospects seen for commodity futures
Commodity futures trade trebles in 2005-06

More Stories on : Editorial | Commodity Exchanges | Commodity Markets

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Futures, not perfect commodity yet

Farmers bear the cross
Are we killing the self-employed?
MAT credit disclosure
Defining pension benefits
Minding those who meddle with money
The wisdom of IPO rating
Take a call on telecom
Needless controversy by the Tax Dept
Credit Policy

The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |

Copyright 2006, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line