COMMODITY TRADING IN INDIA

Commodity trading in India

Before the advent of the industrial revolution, trading mainly took place with agricultural commodities such as corn, maize, oats, wheat, livestock, hogs and pigs. In 1848, the world’s oldest futures exchange was formed and it was named the Chicago Board Of Trade [CBOT]. Thereafter, many such exchanges were formed all around the world. 

The trading is done by contracts, which include 

1.) spot trading, where the delivery takes place immediately or in minimum time

2.) forward contract, where the buyer and seller agree to a price for a commodity, which is to be delivered at a mutually agreed date and quantity

 3.) futures contracts, where the conditions are the same as the forward contract, but are transacted through a futures exchange. 

There are many agricultural and industrial commodities now being traded in the commodities market. The list of the most common commodities and the exchanges they are normally dealt through are given below:

The Indian commodity market is estimated to be around Rs 11,00,000 crore, which includes agricultural commodities (rice, wheat, soya, groundnut, tea, coffee, jute, rubber, spices, cotton,
etc), precious metals (gold and silver), base metals (iron ore, aluminum, nickel, lead, zinc, etc) and energy commodities (crude oil and coal).

"The aspiration of a strong commodity market is based on the fact that commodities-related industries constitute about 58% of the country's GDP," says Jignesh Shah, managing director, MCX, a Mumbai-based independent commodity exchange.

Currently, the various commodities traded across the exchanges clock an annual turnover of Rs 2,90,000 crore, which includes the high-volume crude oil trade listed recently on the MCX. This figure can grow multifold with the introduction of futures trading and participation of more retail investors.

According to the commodity research site indiancommodity.com, the commodity market is expected to grow at an annual rate of 40% over the next five years. The lucrative commodity futures volumes touch $800 mn a day on an average. This is expected to grow at 100% every year. With FIIs eying the Indian markets in a big way, commodities can also gain unfathomable depth.

With a minimum investment of as low as Rs 5,000 and more than 42 traded commodities on offer for the investor, commodity trading is a hot option. The trading has been further boosted by the emergence of a highly evolved national commodity markets on the lines of NSE.

Besides the three national exchanges -- National Commodity and Derivative Exchange, the Multi Commodity Exchange and the National Multi Commodity Exchange -- there are 22 more exchanges and trading boards recognised by Forward Markets Commission (FMC), the market regulator.

Several high-profile equity brokers have become members with NCDEX and MCX. The names include Refco Sify Securities, Sharekhan, ICICI Commtrade, ISJ Comdesk and Sunidhi Consultancy, and are already offering commodity futures services. Some of them also offer trading through the Internet just like the way they offer equities.

With the WTO regime ushering in a new era in global trade, commodity trading becomes a global phenomenon as price issues cannot be manipulated easily, hence futures and options can be used in trading.

India being a major user of crude oil, (which is the world’s most traded commodity), edible oil and gold can become the hub of such commodities. Every year, India buys $25bn worth of crude oil, $8.5bn worth of gold and $9 bn of edible oils.