Indian investors missed the global bull run in commodities as the domestic futures underperformed global peers by significant margins on frequent government interventions, ban on some futures and on an appreciating rupee.
Four prominent commodity indexes on the National Commodity and Derivatives Exchange Ltd (NCDEX) and Multi Commodity Exchange of India Ltd (MCX) averaged total returns of only 2% in 2007.
In contrast, five most prominent global indexes in the energy, metals and agricultural markets ended with profits of almost 30% on an average, best in nearly three decades.
“Gains were capped mainly due to ban on some futures, which shook investors’ confidence,” said Sonu Mehta, economist, NCDEX.
India banned four agricultural commodity futures, including wheat and rice in January and February for their presumed role in stoking inflation. Wheat rose 100%, while rice rose 34% on the Chicago Board of Trade (CBoT) in 2007. Among other agricultural commodities, soya bean gained 45.6%, trailing 76% gains on CBoT. Maize gained a mere 0.8%, compared with a 14% rise on CBoT.
Gains on CBoT soya bean, maize and wheat were driven by investment fund buying anticipating their use in biofuel.
“India missed on such an opportunity as it doesn’t allow financial institutions and funds to trade in commodity bourses,” said an analyst with a Mumbai-based commodity brokerage.
The regulator, Forward Markets Commission (FMC), increased the entry load by raising trading margins while limiting trade by reducing position limits frequently last year.
However, commodities such as sugar did not mirror global cues as domestic fundamentals held sway, analysts said. In fact, sugar futures at IntercontinentalExchange Inc. (ICE) track India, analysts said.
CBoT wheat and Malaysian palm also track India fundamentals, as it’s a major importer of both.
“There is a slow but marked shift...the world is looking more into Indian commodities...,” said Avinash Raheja, senior vice-president with Commtrendz Risk Management Services Pvt. Ltd.
The rupee is to be blamed for limited gains in commodities such as precious metals and energy, which mirror global futures, said Kunal Shah, analyst, Motilal Oswal Commodities Broker Pvt. Ltd.
The rupee rose 12.3% against the US dollar in 2007, knocking off gains in energy and precious metals, where trade is settled based on rupee-dollar reference rate.
The MCX crude oil rose 37.8%, while overseas crude prices rose 58%. Similarly, natural gas gained only 4.8% on MCX, while it climbed 19% on NYMEX (New York Mercantile Exchange).
Gold appreciated 14.4% in 2007, while overseas gold saw its highest annual gain in 28 years—up 32%.