Commodity markets in India comprise precious metals, other metals, agriculture and power. Commodity futures help hedge price risk, facilitate price discovery, and stabilize prices. Arbitrage opportunities exist due to differences in perception, demand/supply dynamics, and market inefficiencies across cash/futures markets and locations. While India has potential in commodity markets, it faces issues like lack of education, low participation, delivery and transportation challenges, and lack of organized commodity exchanges. Future prospects include increased volumes, reduced price distortions, jobs growth, and deeper markets with institutional participation.

1. Commodity Market
Overview & Prospects of
Arbitrage

2. WHAT COMPRISES COMMODITY MARKET?
Commodity
markets
Precious Other
Metals Metals
Agriculture Power

3. CONCEPT
 Commodity futures are tool used to hedge
the price risk of underlying commodity.
 Helps in price discovery of underlying
commodity
 Helps in stabilizing the price of
commodity for longer term.

4.  Reduce the price disparity over two
geographical locations and bridge the
demand/supply position over two
locations and manage the regional
distortion
 Bring out the information about the
commodity indicating the price trend.

5. CURRENT ISSUES FOR GROWTH OF
MARKET
 Lack of education and awareness of
exchange amongst the marks of Investors,
Traders (resulting low liquidity)
 Low participation of Indian Corporate
(Again due to the above)
 Common delivery system for all exchange
in demat form, which would ensure
automatically the product standards

6.  Delay in formations of Regulation for
Institutional Investor, which are in
pipeline.
 The differential Sales Tax & Local Tax
requires an early introduction of Value
added Tax System.
 The delivery center of commodity
should be in multiple locations as presently
in one location for one product in
most of commodities.

7. COMMODITY MARKET IN INDIAN SCENARIO
Bullion
 Market
 Largest consumer (Rs. 400 bn) – traditional form of investment
 Large stock of unaccounted metal
 Skills in hand made jewellery
 Potential
 Use it as monetary unit to boost rural economy
 Effective instrument for investment diversification
 Boost jewellery exports
 Impediments
 Differences in sales tax, octroi & stamp duty among states
 Lack of good assaying practices – difficult to liquidate
 Little avenue to hedge price risk of jewellery exporters

8. Other metals
 Market
 Indian Production (Al, Cu & steel) – Rs. 600 bn
 Largest exporter of iron ore and alumina
 Large importer of copper
 Current trade by negotiation / price setting by producers
 Potential
 Increased scope for aluminum & steel exports
(as against alumina and iron ore)
 Stable metal prices can fuel boom in downstream industries
 Rival China as preferred manufacturing location
 Growth in manufacturing to equal that in services
 Impediments
 No organised exchange in India – price discovery difficult
 Significant PSU participation

9. Agriculture
 Market
 Agricultural share in GDP – 26% (Rs. 5000 bn)
 Large producer of cotton, cereals, sugar, fruits, spices etc
 Current exports of about USD 4 bn
 Specific commodity based exchanges – not very successful
 Potential
 Diverse gene pool and climatic conditions
 Increase in agricultural exports – sugar, cereals
 Increase in processed foods production & consumption
 Impediments
 Restrictions on inter state movement
 Poor transport & warehousing – 30% wastage in cereals
 Member controlled exchanges – transparency issues

10. Power
 Market
 Large requirement and trading in Power units
 Exports and imports of excessive units.
 Specific commodity based exchanges – not very successful
 Potential
 Diverse climatic conditions
 Increase in demand.
 Increase in disinvestments among PSU’s involved in trading.
 Impediments
 Restrictions on inter state movement
 Poor transport mechanism
 No organised exchange in India – price discovery difficult
 Significant PSU participation

11. Trade Potential
Physical 3 time 5 time
trade multiple multiple
(Rs. in bn) (Rs. in bn) (Rs. in bn)
Bullion 400 1,200 2,000
Metals 600 1,800 3,000
Agriculture 5,000 15,000 25,000
Energy 5,000 15,000 25,000
Total 11,000 33,000 55,000

12. ADVANTAGE THE ORGANIZED SECTOR
OFFERS
 Facilitate high quality intermediation
 Foster professionalism and transparency
 Nation-wide reach and consistent offering
 Provide impetus to commodity market
and generate higher volumes

13.  Inculcate international best practices
Demutualisation
Technology platforms
Information dissemination without
noise
Low cost solutions

14. FUTURE PROSPECTS
 The prospect of commodity exchange in
India store a bundle of opportunities in
term of following:
 In term of volume, as many of market
player would tend to participate for their
ask management which would ensure
liquidity for the lines to come.

15. FUTURE PROSPECTS contd.
 Since the exchange would play like a
nationwide common market, it would
reduce the dis-equilibrium of
price/demand supply
 Creation of employment opportunities.
 The participation of institutional
Investor, like Files, Mutual Funds, would
with distinct emails and provide further
depth to the market.

16. V o lu m e o f E x is t in g E x c h a n g e s
Commodity Exchange Products Approx
Annual Vol.
(Rs. Crore)
NBoT, Indore Soya, Mustard 80,000
NMCE, Ahmedabad Multiple 40,000
Ahmedabad Commodity Exch. Castor, Cotton seed 3,500
Rajdhani Oil & OilSeeds Mustard 3,500
Vijai Beopar Ch., Gur 2,500
Muzzaffarnagar
Rajkot Seeds Oil & Bullion Castor, Groundnut 2,500
IPSTA, Cochin Pepper 2,500
Chamber of Commerce, Hapur Gur, Mustard 2,500
Bhatinda Om and Oil & Gur 1,500
Oilseeds
Others (mostly inactive) 1,500
TOTAL 140,000

17. ARBITRAGE IN COMMODITY EXCHANGE
Arbitrage can be in the following ways:
 Cash (Spot market Vs. future market)
 Future Vs Future (Intra Exchange)
 Domestic Vs International.

18. WHY ARBITRAGE OPPORTUNITIES EXITS
 Different in perception of different
investors;
 Demand and supply over market or over
location
 Market inefficiency

19. ADVANTAGES OF ARBITRAGE
 Reduces market inefficiency
 Provide liquidity to the market
 Act like a market equalizer tool
 Ensure risk free profit