India’s commodities market regulator Forward Markets Commission (FMC) wants to boost futures trading by introducing it in commodities such as carbon (which started on Monday). It also wants to restore futures trade in wheat, rice, urad and tur, banned by the government last year, and revisions of limits on positions imposed on trade in certain commodities such as pepper. FMC chairman B.C. Khatua admits that there has been only a marginal rise in turnover in commodities trade, from Rs34.84 trillion in 2006 to Rs36.55 trillion in 2007. He also admits that trading volumes in some agricommodities have been shrinking.
In an email interview with Mint last week, Khatua, who said he expects 2008 to be a watershed year for farmers’ participation in the commodity futures market, outlined his plans. Edited excerpts:
Trading volumes in commodities have not been growing. What are the reasons for this?
FMC chairman B.C. Khatua
The main reason for low growth in volume of trading in 2007 is the deceleration in trading volume of agricommodities. Suspension of trading in four major agricommodities—wheat, rice, urad and tur—has not only caused loss of volume but also affected the sentiments. Quality and delivery-related issues in a few commodities also affected the market.
To some extent, tightening of regulatory measures such as open interest limits and increase in margins in highly volatile commodities also contributed to this slowdown. Additional margin requirements for trading in pepper, jeera, guar gum and seed, chana, red chilli, mentha oil and maize were removed in December.
The volume of trade for non-agricommodities rose manifold last year. This means farmers are not getting the benefit from the market. The futures market is not a tool for price discovery for them.
As I have stated, volumes in agricommodities have been adversely affected by various factors. The exchanges have been given instructions to sort out quality and delivery problems and facilitate better payment system. FMC has already removed the regulatory margins. We are also looking into the scope for liberalization in open interest limits. The exchanges are also developing a farmers’ aggregator scheme, which will help farmers to directly participate in the futures market.
Price ticker boards are being installed in mandis (local market places) and rural post offices to facilitate farmers’ planting and marketing decisions. Restoration of trading in the suspended commodities, wheat, rice, tur and urad, will also help. We expect 2008 to be a watershed year for farmers’ participation in the commodity futures market.
How far have the regulatory measures affected the growth of the futures market?
They certainly have affected the trade volume in agricommodities. While the limits on open interest position were necessary for better regulation of a volatile market at the given point of time, they are being reviewed and revised in the changed circumstances.
We are reviewing the open position limits on a number of commodities and will come out with revised limits soon. Efforts are also being made to restore trading in the four suspended commodities. It is sad that while futures trade in wheat is banned here, the government looks at international exchanges for determining the price at which wheat can be imported.
The report of the Abhijit Sen committee that looked into the impact of futures trading on farm commodity prices is yet to be submitted. What are the steps being taken by FMC in this regard?
The study by IIM Bangalore and all subsequent price movements clearly indicate that the futures market was not responsible for price rise in the suspended commodities. It is the market fundamentals of supply-demand that propelled the prices of commodities. FMC is expediting the Sen committee report and revocation of the suspension of trading in the four commodities.
Is the growth in the commodity futures market speculation-driven? Also, do you visualize any change in the current law that does not allow investments by banks, foreign institutional investors and mutual funds in commodity trade?
The derivative market always needs the speculators and speculation to facilitate risk transfers from the hedgers. What is important is to see as to whether the market is getting distorted by excessive speculation and whether the prices are not reflecting the physical market fundamentals.
FMC has been successfully monitoring and maintaining balance between speculators and other market players through various regulatory tools. What is now required is to get the big corporate hedgers and the institutional investors such as banks and mutual funds on the trading platform in order to provide greater breadth and depth... Once the regulatory framework is strengthened and options trading is permitted, we hope to bring in the large corporations and banks and mutual funds into the market. This will facilitate another quantum jump in the trade as happened between 2004 and 2006.
Even the government trade promotion body, Rubber Board, wants a limit on volatility...
Volatility is a function of the changes in the supply-demand position of an underlying commodity and is never constant. The physical market reacts to changing supply-demand equations and moves with a time lag unlike the futures market which factors in such information much faster.
Therefore, intra-day volatility in both the markets will always have some difference. FMC factors in inputs from all sources, including...boards such as the Rubber Board in fixing the price band for futures trading and reviews them from time to time.
How far has FMC progressed on its programme to revive regional exchanges, including the oldest pepper exchange, the India Pepper and Spices and Trade Association?
We have received a lot of feedback to our structured queries from the regional exchanges and their stakeholders. We have proposed to hold a detailed discussion with them before finalizing a feasible road map for them.
The futures market has constraints such as the pending of the Bill to amend the Forward Contracts (Regulation) Act (FCRA), which will put FMC on a par with capital market regulator, Securities and Exchange Board of India. When do you expect this to come through?
FMC is greatly constrained by the lack of an effective regulatory framework which the FCRA amendment Bill will address. We are pursuing with the government to get the Bill cleared as soon as possible.
We can consider a confederation of regional exchanges, not their merger, which will be discussed soon at the national meeting of exchanges.
Any plan for new products to give a push to the futures market?
We are waiting for the FCRA amendments to go through and after that it will be possible to introduce contracts on options and various indices. They are expected to take the market to the next high growth trajectory.
We are set to allow futures trade in carbon next week and are also looking at night trade in a few select commodities of international relevance. This will give the trade an opportunity to take positions based on trade in exchanges abroad, which begin operations after our markets close.
Do you visualize space for more exchanges? Or is it time for consolidation?
While the existing national exchanges need to consolidate their position in terms of trade volumes, liquidity, delivery and governance-related issues, there is always scope in a vast country like ours to have one or two more major exchanges with niche products and innovative contracts.
A bit of healthy competition is not bad for an emerging market which has so much potential. FMC is ready with a draft guideline for starting new exchanges. Once finalized, we can consider the proposal of the government-run Metals and Minerals Trading Corp. (MMTC Ltd) tying up with a financial services company to start a new exchange.