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Indian Commodity Markets : Far from Perfect & Sound

, September 25, 2011, 1 Comments

Today we have three national level commodity exchange i.e. MCX, NCDEX & NMCE along with the kinds of ICEX and NBOT. Even after 7-8 years of such an exchange in to operation our commodity market are seems to be far from perfect and sound.

Idea of Exchange Traded Commodity Futures

The noble Idea of setting up commodity futures market was  to provide a technological platform which will bring so many benefits to different sections of participant such as Farmer, Trader, Arbitrageurs.

For the farmer it was supposed to be an ideal platform for hedging the risk, for trader it was an ideal platform for take a view (may be speculative) and derive benefit from the given situation. For those private financiers who would spot arbitrage opportunities between spot and future and benefit from   mis-pricing. As of today everybody has something to reconcile for.

For example the Exchange Traded commodity future market today has raised certain issues which require a national debate with an open mind. There is another aspect of commodity market i.e. Deals normally struck on a negotiated basis among commodity market (Mandi) participant mainly intermediary such as commission agent or clearing agent.

 Regulatory Environment & Market Structure

Over the last several years the body which governs the commodity market i.e. The Forward Market Commission (FMC) has gone a tremendous amount of change and being empowered to carry out its function of regulation.  Another important development which is restricting the growth of commodity market is not a very strong Electronic Spot Market and absence of the commodity Options Segment. If we take the example of Equity Market both above features has been an important pillar for the explosion of volume growth of the market.

Commodity Options – A vital missing link

With only commodity futures are being allowed to trade and Nonexistence of Options market, it would give little scope as far as execution of trade is concerned. Normally trader either takes a naked long or short or may take inter-month spread currently but if Commodity options are being available, then possibility may increase many fold as different permutation and combination is possible with futures and options both are available. A bill in parliament is pending if get clearance, will pave the way for introducing Commodity Options in reality. Commodity Options based on Commodity Futures can be a move to experiment with, whenever we get regulatory go ahead.


Neither has it proved to be an ideal platform for hedging nor it has delivered up to the expectation of other market participant (such as traders & arbitragers) it remains to be seen that where Indian commodity markets are headed. The more interesting question is –  “It is beneficial for whom Farmer, Trader or somebody else?”