Types of Commodity Market in India

 

Commodity Derivatives and the Types of Commodity Market in India

The Indian commodities market works on the principle of futures contracts. These contracts are contracts between two parties to buy or sell a specific commodity at a future date. The buyer of a futures contract is called the "long position" while the seller is called the "short position". These contracts allow for a transparent process of determining the real price of commodities, thereby protecting producers from incurring massive losses. But what is futures contract and what are its benefits?

Futures

The Indian economy is a major source of commodities and commodity derivatives are vital to the price risk management process, especially in agricultural surplus countries. Commodity derivatives are unique hedging instruments used extensively in the global market. However, India's futures market is limited to commodity futures and therefore, the study explores the current status, growth constraints and developmental policies for the Indian futures market. To this end, it surveys the publicly available websites of recognized commodity exchanges in India and the regulatory framework for futures trading in the country.

The futures market is widely used by farmers in Western countries to hedge their agricultural prices. However, in India, this market is relatively small and dispersed, and the only source of financing for these farmers is the aggregator. The market is currently facilitated by middlemen and has limited transparency. But a well-organized commodity market can function as an aggregator and facilitate dispersed farmers. By facilitating farmers, it allows them to raise finance against warehouse receipts, and it rids the sector of unorganized financing.

The Indian commodity market is 17 years old. It is currently striving to garner international recognition with innovative products and mechanisms. Futures trading in the Indian market should trade in commodities with a high level of liquidity and trade in a variety of segments, including energy, oil seeds, spices, and metal index. To ensure a smooth transition to this market, companies must have extensive domain knowledge and experience. They must be able to address the most pressing needs of their customers.

There are many risks associated with commodity investment in India, but commodity futures contracts allow investors to participate in commodity price movements through an indirect method. Investors can hedge their risk by purchasing gold futures contracts and sell them if the price rises too quickly. In addition to this, commodity futures can be a great way to hedge against currency fluctuations. In addition, a commodity futures contract allows a jewellery manufacturer to hedge against gold price volatility without having to wait for a specific price increase.

Spot

There are three major aspects to the Indian commodity market. There are the spot market, which is governed by state governments and the SEBI, which regulates commodity futures and the forward market, which is custom-tailored to individual parties. The third aspect of the commodity market, known as the futures market, is regulated by the SEBI and is also open to private participation. The futures market is the underlying commodity that is traded through exchanges.

There are two types of markets in India: futures and spot. Futures are based on futures and physical spot prices. They converge because of arbitrage. Because there are both long and short positions, the market moves in tandem. But there is no 100% market convergence due to friction. For example, the delivery rate in the international spot market is less than 1%, while in India, it is more than twenty-five percent.

The futures market is based on contracts that are made between two parties to buy or sell an asset. The contract usually ends when payment is made, which can be either the present or future date. In a futures contract, the buyer holds a long position in the asset, while the seller holds a short position. The spot market in India allows producers to discover the real value of their products and prevent them from incurring massive losses.

While the futures and spot markets are interconnected, their differences in regulation may make it difficult for the markets to operate as efficiently as they should be. Inefficiency can occur due to regulatory loopholes that can be exploited by unscrupulous participants. During 2014-2015, the Securities and Exchange Board of India (SEBI) dealt with this problem. This was an important issue in the Indian context. The SEBI has subsequently resolved these issues.

The spot commodity market in India has three primary exchanges. All three exchanges have trading facilities, including futures. The commodities listed on these exchanges are rice, oil and oilseeds, red chili, and jeera, and pulses such as urad, yellow peas, and tur dal. Various commodities such as iron ore, coal, and bauxite can also be traded on the spot market.

Agricultural markets

Agricultural markets in India are divided into three types. The regional markets are in the major towns near agriculture centers, while the secondary wholesale markets are found in important trade centers near railway stations. All of these markets have a common feature: they handle large quantities of agricultural produce. But the rural markets are much simpler, and bricks are used as weights. The weights are often deficient. In addition, the prices of agricultural products are determined by intermediaries and not the farmer.

The marketing method is the primary challenge in moving from conventional agriculture to modern agriculture. Traditional modes of transportation, such as horse and cart, are a challenge. Farmers must use trucks for peregrinations and have to pay huge transport costs. Agricultural marketing is one of the most effective ways to stimulate demand and accelerate economic growth. In addition, it supports the growth of agro-based industries and boosts the overall economic development phase.

The government's Ministry of Agriculture's Directorate of Marketing and Inspection conducted a survey of more than 500 regulated markets in India to identify deficiencies and propose measures to increase market efficiency. The ministry of agriculture then created a central sector scheme to support the development of market infrastructure. The ministry would provide grant money for 20% of the cost of developing the market, while the remaining funds would have to be provided by commercial banks. The survey results also identified the need for more research to develop rural markets and to ensure that these markets are profitable and efficient.

The state government of Karnataka, meanwhile, has introduced the UMP, a single platform that unites the 164 regulated wholesale agricultural markets in the state. The UMP has already integrated 162 out of 164 regulated markets in Karnataka. In a single year, the UMP has traded more than 62 million metric tons of agricultural commodities, generating $21.7 billion in trade. As a result, it has changed the structure of agricultural markets in India. This has a positive impact on farmers' profitability and market prices.

Commodity derivatives

As one of the major pillars of the financial landscape of any major economy, commodity derivatives have a vital role to play in managing price risks and enhancing market competitiveness. India is a major producer and consumer of various commodities, and the introduction of SEBI initiatives to regulate this market could catapult it to the global elite. Here, we will discuss the role of commodity derivatives in the Indian economy and outline the regulatory structure and infrastructure that govern this industry.

The development of the commodity derivatives market in India has been exceptional over the past few years, but it is still in its infancy. The market has seen a relatively low level of financial inclusion, and the Indian public is largely uninterested in its benefits. In March 2019, SEBI allowed portfolio managers and mutual funds to participate in commodity derivatives. However, this move has not prompted many investors to invest in the sector.

The Indian commodity derivatives market will likely benchmark alongside the equity derivatives market. For example, the Bank NIFTY Index options are one of the most liquid stock index options contracts in the world. In the meantime, the market will likely develop some time before it catches up with international markets. In the meantime, investors should start trading in liquid contracts and develop the habit of squaring off their positions before expiry.

India's commodity exchanges have served a useful purpose in price risk management. However, the nascent commodity market has seen its share of hiccups. SEBI, the market regulator, and other stakeholders must coordinate their efforts to reduce price risk in this market. And as the market matures, it will become more diversified and more competitive. And with global markets increasingly integrating the Indian commodity market, the importance of commodity derivatives cannot be underestimated.

Although farmers in India do not usually use the exchange platform, it is possible to hedge the price risk with other instruments. A farmer, for example, may be unable to participate in the commodity derivatives trading market due to small holdings. In this case, there are other ways to mitigate price risk and ensure profits. But farmers should not be tempted to make such a significant investment without first examining the feasibility and benefits of trading in commodity derivatives.