India, a country with a population of over one billion, is
essentially a commodity based economy encompassing agriculture, precious metals
and base metals. The size of the physical commodity market in India is
estimated to be around Rs.11 lakh crore per annum. Of late, commodities have
come to be accepted as a separate asset class with a unique and distinct source
of returns, along with traditional avenues like stocks, bonds and real estate.
The increasing volumes on commodity exchanges such as MCX and NCDEX suggest
that commodity markets in India are here to stay.
What is "Commodity"?
Commodity includes all kinds of goods. Forward Contracts
Regulation Act, 1952 (FCRA) defines "goods" as "every kind of movable property
other than actionable claims, money and securities". Futures' trading is
organized in such goods or commodities as are permitted by the Central
Government. At present, all goods and products of agricultural (including
plantation), mineral and fossil origin are allowed for futures trading under
the auspices of the commodity exchanges recognized under the FCRA. The national
commodity exchanges have been recognized by the Central Government for
organizing trading in all permissible commodities which include precious (gold
& silver) and nonferrous metals; cereals and pulses; ginned and unginned
cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and gur;
potatoes and onions; coffee and tea; rubber and spices, etc.
Commodities offered on MCX & NCDEX...
Precious Metals: Gold, Silver
Other Metals: Aluminum, Copper, Nickel, Steel, Tin...
Energy: Crude Oil, Brent Crude…
Agricultural Products: Chana, Guar Gum, Guar Seed,
Gur, Jeera, Maize, Kapas, Silk, Raw Jute, Jute Sacking Bags, Red Chilly,
Basmati Rice, Rice, Urad, Wheat, Pepper, Cashew, Castor Seed, Crude Palm Oil,
Expeller Mustard Oil, Mustard Seed, Ground Nut Oil, RBD Palmolein, Soya Bean,
Soy Seed, Ref. Soya Oil, Rubber, Sugar, Turmeric, Yellow Peas…
There are a number of other commodities traded including
their variations and this list is continuously expanding.
At present, trading in commodities is restricted to futures
contracts only. The Exchanges are also in the process of establishing online
Spot Exchanges as well.
Participants in the Commodities Futures Market
Hedger: One who wants to hedge the price risk in the
commodity he is exposed to. He transfers the price-risk associated with the
ownership of the commodity by taking an equal and opposite position in the
futures market. Any loss resulting from change in spot prices will be
compensated by an equivalent gain in the futures market. Similarly any profit
which he might realize from change in spot prices will be set off by the loss
that will be incurred from position taken in the futures market.
Investor: One who sees participation in the
commodities market only as an investment opportunity to diversify the risk of
Arbitrageur: One who works at making profits by
taking advantage of discrepancy between prices of the same product across
different markets. If, for example, they see the futures price of a commodity
getting out of line with the cash price, they would take offsetting positions
in the two markets to lock in the profit.
Speculator: One who wishes to bet on future movements
in the price of a commodity. Futures contracts give them leverage; that is, by
putting in small amounts of money upfront, they can take large positions on the
market. As a result of this leveraged speculative position, they increase the
potential for large gains as well as large losses.