Eco Survey endorses futures trading in commodities

Eco Survey endorses futures trading in commodities
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First Published: Tue, Feb 27 2007. 11 31 PM IST
Updated: Tue, Feb 27 2007. 11 31 PM IST
The Economic Survey has made a strong pitch for a commodities futures market even as policy makers are debating whether the government should ban futures trading in farm commodities to check inflation.
“An efficient and well-organized commodities futures market is generally acknowledged to be helpful in price discovery for traded commodities,” the 2006-07 Survey, tabled in Parliament by finance minister P. Chidambaram on Tuesday, says. “Futures market, as observed from the cross-country experience of active commodity futures markets, helps in efficient price discovery of the respective commodities and does not impair the long-term equilibrium price of commodities,” it adds.
According to the survey, speculators play a role in providing liquidity to markets and may sometimes benefit from price movements, but do not have a “systematic causal influence on prices”. “At times, price behaviour of a commodity in the futures market might show some aberrations... but it quickly reverts to long-run equilibrium price, as information flows in, reflecting fundamentals of the respective market,” it adds.
Defending the stance of the survey, Madan Sabnavis, chief economist of the Mumbai-based National Commodity Derivatives Exchange (NCDEX), says: “The future prices mirror ground realities. Commodity prices have risen not because of the speculation in the futures market but because of the crop failure last year. We need to overcome this misconception. The prices of pulses like moong dal, which aren’t even traded on exchanges, have also gone up because of the same reason. As an exchange, our motive is to have a healthy mix of speculators and end-users like farmers and corporations and increase the awareness about the futures market.”
According to him, end-users like farmers may not directly benefit from the futures market now, but the exchange’s research has shown that in case of some commodities, farmers do take the decision to sell their crop on the basis of the prevailing prices in the futures market.
The turnover of the commodities futures market as a proportion of India’s gross domestic product (GDP) has grown phenomenally, from 4.7% in 2003-2004 to 76.8% in 2005-2006. The number of commodities that are traded on commodity exchanges has gone up from 59 in January 2005 to 94 in December 2006. While Multi Commodity Exchange (MCX) and NCDEX, two leading commodity exchanges in Mumbai, account for 93% of the total turnover in the futures market, the National Multi Commodity Exchange (NMCE), Ahmedabad, has also seen a surge in its volumes.
“We are competing with international benchmarks. Now what we need is the right kind of corporate structure. In terms of organizational framework, we should be treated on a par with stock exchanges and have the same framework as other global commodity exchanges,” says Jignesh Shah, managing director of MCX.
Under existing laws, foreign institutional investors, mutual funds and banks are not allowed to trade in commodities in India although they can trade in the stock exchanges. The government is expected to come out with new norms on the ownership of such exchanges soon.
“The Survey has illustrated one important issue—the growing focus on commodities trading. Last year’s Economic Survey had a few paragraphs on the commodities futures market. This year, it has devoted three full pages to this segment. We find nothing unusual about it as over the next few years trading in commodities exchanges will possibly surpass that in stock exchanges,” says a commodity analyst, who does not wish be identified.
(PTI contributed to this story.)
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First Published: Tue, Feb 27 2007. 11 31 PM IST
More Topics: Money Matters | Commodities |