Commodity Trading

May be defined as a process through which a physical substance such as food grains or metals which are interchangeable with another product of a similar type, which an investor buys or sells usually through a futures contract, the price of the commodity in question being subject to supply and demand.

In order to facilitate commodity trading, the Govt. in India initiated a few policies which embarked upon a nation-wide multi-commodity exchange, expansion of permitted list of commodities under the forward contracts act & many more…To elaborate, nation-wide multi-commodity exchange would essentially make the availability of the futures contract in the most cost effective price, also futures market would improve the price risk management systems & maintain the financial integrity of the economy. With the setting up of three Multi Commodity Exchanges, retail investors can now trade in Commodity Futures without having to take delivery of physical stocks.

In fact to understand better, forward contracting necessarily facilitates to manage the supply – demand risk, further, forward contract gives rise to price discovery & price risk …this is where furthers contract come in picture. We can say that Forward & Futures compliment each other. Essentially trading in futures options is banned by the FMC / Govt. of India, but this will be discouraged once the price discovery & risk management will be in place (i.e. it will happen with the increase in the list of commodities traded).

Trends indicate a surge in the trade volumes – which essentially depicts a remarkable performance of the industry, which is being revived. The year 2007-08 shows an average trade volume of Rs.1, 40,000 Cr. (Inc. MCX & NCDEX) Of the country’s GDP of Rs.13, 20,720 Crores, Commodities related businesses constitute about 58%.. The turnover of the Indian Commodity exchanges led by this Multi Commodity Exchange of India Ltd. is slated to achieve Rs. 50 Trillion by the next financial year.

Having given the mandate (by Govt. of India) to 4 entities namely: MCX, NCDEX, NMCE, and MMTC to set up national commodity exchange, the government is willing to set the platform for trade nationally rather than regionally for all commodities.

These 4 entities would not essentially be a threat to the regional commodity exchange specifically because of the following reasons: