Challenges to commodity markets in india.pptx


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o This project lists the numerous bottlenecks and hurdles in the way of a smoothly operating commodity markets. It covers Forward Contracts (Regulations) Act and its amendments in recent years, the role of Forward Market Commission in the market, various legal, regulatory, infrastructural challenges along with major initiatives taken in 2010-11

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Challenges to commodity markets in india.pptx

  1. 1.  Definition  Commodity – As Asset Class  Commodity – Uniqueness  Classification of Commodities  Indian Commodity Market Size  Performance of Indian Commodity Market  History of commodity 2  Interventions by Govt.  FC(R) A ,1952  Evolution of FMC  Kabra committee report  Challenges faced by commodity markets presently  Legal Challenges  Regulatory challenges  Infrastructural challenges  Awareness amongst investors and farmers  Other Challenges  Suggested measures for smooth operations of commodity markets 1
  2. 2. Wheat in your bread Petrol in your vehicle Coffee on your table Sugar in your sweets Chana in your chhole Gold in your necklace ……… and so on ……. Commodities are everywhere 2
  3. 3.  Characteristics  Commodity is anything movable (a good) that has following characteristics  Fungible, i.e. the same no matter who produces it  Derivatives, i.e. involves further processing into number of products  Economic cost, i.e. production of it involves some cost 3
  4. 4.  In financial parlance, assets are economic resources that is capable of being owned or controlled to produce value  Commodity too has gained importance currently as independent asset class  Commodity, being the natural goods are independent of other asset classes   Assets Classes  Equities : Performer during economic expansion & an out performer over very long term…  Fixed Income : Performs at the later stage of recession…  Real Estate : Performs during early expansion…  Commodities : Performance spread evenly over the economic cycle… 4
  5. 5. 1. Seasonality A major force in the commodities markets 2. Correlation Unlike other asset class, commodities are positively and negatively correlated within & outside the group which is unique to commodities only 3. Weather No other asset class are so much influenced by weather patterns 4. Hedge Provides natural hedge against war, inflation, other asset portfolios, recession etc. example -GOLD 5
  6. 6. Commodity – PerformanceReturns Over Different Asset Classes in 4 Yrs. 69.51 73.72 75.95 88.46 31.55 -1.44-10 0 10 20 30 40 50 60 70 80 90 100 SENSEX NIFTY CNX 500 NCDEX AGRI INDEX INR MCX METAL INDEXSource:Bloomberg,Way2Wealth Research 6
  7. 7. Various Asset Classes Performance 60 80 100 120 140 160 180 200 220 240 260 Oct-05 May-06 Dec-06 Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 NCDEX Ag Index Nifty USDINR MCX Metal Index 7
  8. 8. Indian Share in Global Commodity Market 91% 9% Global India Global Vs. India  Global commodity has relatively long history  Size is 9 times larger than India India  Commodity futures, though active since 19th century was banned later in 1970’s  Commodity volumes shoots up significantly after re-launch in 2003  MCX emerged as world’s Sixth largest exchange  Volumes on Indian exchanges are increasing at CAGR of 73.7 percent 2009 2008 Global 14831317 11712611 India 1469673 1067984 Commodity Trading ( Value in Million USD) 8
  9. 9. Agriculture Grains Pulses Edible oils/seeds Spices etc Base Metals Copper Zinc Aluminum Nickel Tin Energy Crude oil Heating oil Natural gas Furnace oil Etc. Bullion Gold Silver Palladium etc Commodities 9
  10. 10. 20 Other Regional Exchanges NMCE Commodity Exchanges MCX National Exchanges Regional Exchanges FMC – The Regulator NBOTNCDEX Leadership position with >90% share 10
  11. 11. 0 100 200 300 400 500 600 700 2004 2005 2006 2007 2008 2009 2010 MCX NCDEX TOTAL Source:FMC,Way2Wealth Research 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Bullion and other metals 31.5 36.1 57.9 64.6 56.7 40.8 Other than bullion metals - - - - - 23.2 Agriculture 68.2 55.3 35.8 23.1 11.9 15.7 Energy 0.3 8.4 6.3 12.3 - 20.3 Others 0.0 0.1 0.0 0.0 31.4 0.0 Source:FMC,Way2Wealth Research Segment wise % Share of Commodities * 2008-09 other segment includes energy& other metals Significant rise in volume since launch of exchanges in 2003 MCX Leader in Metals & Energy NCDEX Leader in Agri > 65% CAGR Growth Volume Growth in Indian Exchanges 11
  12. 12. India Commodity Wise Market Share in 2004 17% 15% 1%0% 67% 0% Gold Silver Crdue oil Copper Total agri Others India Commodity Wise Market Share in 2009 31% 15% 20% 13% 12% 9% Gold Silver Crdue oil Copper Total agri Others 12
  13. 13. Returns Across Various Commodities in 5 Yrs. 92.86 62.54 3.83 -12.36 -45.21 9.25 87.12 22.25 4.96 9.65 51.16 142.80 94.21 485.86 23.60 -100 0 100 200 300 400 500 600 Gold Silver Crudeoil Copper Zinc Aluminium Lead GuarSeed GuarGum SoyOil Soybean Pepper Jeera Turmeric MenthaOil Source:Bloomberg,Way2Wealth Research  Almost 45 commodities are available for trading in both NCDEX & MCX  Though few have been de-listed during high inflation times, re-listing also has happened  Bullion, Base metals, energy & Agri are the major contributors in terms of volumes 13
  14. 14. History of commodity trading in India 14
  15. 15. 1875- Establishment of Bombay Cotton Trade Association 1893- Establishment of Bombay Cotton Exchange Ltd. 1912-Future trading in raw jute and jute goods began in Calcutta 1913-Wheat markets in Hapur began functioning 1919-Calcutta Hessian Exchange 1926- Seed Traders Association Ltd started in Bombay 1927- East Indian Jute Association Amalgamation of Calcutta Hessian Exchange and East Indian Jute Association 1936- Commodity Exchange Act was passed 1939-Ban on markets due to WWII 1964- Futures trading in raw jute suspended 1974- Amendment in Commodity Exchange Act 2003- Reintroducing future trading by government 2008- Ban on four commodities 15
  16. 16. The criteria to assess the success or failure of any government intervention:- Objective of intervention Alternative tools available for achieving the objectives Success of the intervention in achieving the objective Cost (risks, unintended side effects) of intervention 16
  17. 17.  Development was constrained  Ban on cotton, food grains, spices and sugar  Wagons only used for military transport as a result it caused shortages in essential commodities  Rampant hoarding  Futures trading was halted  Food grains, jute and oilseeds were banned under Defence of India rules. 17
  18. 18. Enables the authority to take appropriate actions that may be considered desirable. The act prohibits option trading in all commodities. Empowers the govt to ban forward contracts in a particular contracts in a particular commodity by a notification. Non-transferable specific delivery contracts are ordinarily exempted from regulation. Empowers the central govt to call for periodical returns,annual returns of any other information. Provides penalties against persons who contravene the provisions of the act and the qualifications thereof. Provides for the regulation of the Forwards markets through the governing bodies of recognized associations. Empowers the central government to supersede the governing body of recognized associations and the order it to suspect its business. Empowers the central government to appoint not more than four members on the governing bodies who may act against public interest in the form of FMC. 18
  19. 19. The parliament passed Forward Contracts (Regulation) Act,1952 The Act envisages 3-tier regulation o The exchange which organizes forward trading in commodities can regulate trading on a day-to-day basis. o The Forward Market Commission provides regulatory oversight under the powers delegated to it by the central government and o The central government, Department of consumer affairs, Food and Public distribution is the ultimate regulatory authority. In 1960's following severe draughts that forced many farmers to default on forward contracts and even caused some suicides. Forward trading was banned in many commodities considered primary or essential. 19
  20. 20.  Government set up a committee in 1993 to examine the role of future trading.  The Kabra committee recommended allowing futures trading in 17 commodities groups  The committee recommended certain amendments to forward contracts (Regulations) Act 1952, particularly allowing option trading in goods and registration of brokers with FMC. 20
  21. 21.  The government accepted most of these recommendations and futures trading was permitted in all recommended commodities  Derivatives do perform a role in risk management led the government to change its stance.  Liberalization facilitates market forces to act freely  The next decade is being touted as the decade of commodities 21
  22. 22.  Potential market growth loss due to regulatory uncertainty  Loss of turnover for brokerage houses and hedgers  Absence of information future price for govt to plan procurement  price volatility 22
  23. 23.  Transforms the role of FMC to an independent regulator (similar to SEBI).  Allows trading in all commodity derivatives and also options on goods and commodity derivatives.  Makes a provision for corporatisation and demutualisation of all recognised associations to be approved by the FMC.  At present ready delivery contracts need to be delivered and paid for immediately or within 11 days. The bill extends this period to 30 days.  The number of members of the FMC has been increased from 4 to 9 including one chairman and 3 whole time members.  the bill vests powers in the FMC to impose penalties in cases of failure to furnish information or comply with the directions of the commissions indulging in insider trading or fraudulent and unfair trade practices and in case of contravention of the provisions of the FCRA 1952.  The bill makes a provision for the transfer of duties and functions presently performed by a clearing house to a clearing corporation.  The Central Government would have the power to issue direction to the FMC on matters of policy and to supersede it in certain cases. 23
  24. 24. Legal challenges Regulatory challenges Infrastructural challenges Awareness among investors and producers Other challenges regarding trading 24
  25. 25. Amendment in FCRA Amendment in Banking regulations act Essential commodities act 25
  26. 26. Inadequate regulation by FMC Analyzing the adequacy of powers of FMC Deficiencies in the existing pattern • Organizational • Functional • Operational 26
  27. 27. The FMC needs to operate under a regulatory framework that enables it to:  Protect market integrity.  To preserve the economic functions of the commodity markets to shift commercial price risk and aid in price discovery.  Ensure market fairness.  Ensure financial safety and soundness by guarding against systemic risk. 27
  28. 28.  Warehousing and standardization facilities  Physical deliveries need back up  Cah versus physical settlement  Clearing house  Modern trading rings 28
  29. 29.  Lack of awareness among investors and farmers lead to losses to them for which seminars and mock trading sessions should be arranged 29
  30. 30. Size of contracts too big for small traders and producers Mutual funds and FIIs should be allowed to trade on exchanges Farmers not beneficiaries in price rise Lack of economies of scale Indoctrination is ineffective Issues on warehouse receipts 30
  31. 31.  Commodity exchanges and brokerage houses should be hosting seminar on commodity market awareness.  Conducting mock trading, to providing commodity- specific training on the functioning of the exchange.  Commodity market education should be provided through other media such as educational CDs and cartoon books in order to reach out to more people.  Size of contracts should be split.  Introduction of modern warehouse and clearing house infrastructure.  Giving the FMC the status and power similar to SEBI by passing the FC (R) A Amendment bill. 31