Hyderabad: On the back of global stock and commodity markets volatility, the Forward Markets Commission (FMC), the regulator of commodity futures, is opposed to private equity (PE) and hedge funds trading on commodity markets, said chairman B.C. Khatua. Also, citing falling inflation and softening commodity prices, FMC proposes to recommend that the government lift the ban on rubber, chana (chickpea), soya oil and potato by end-November. Edited excerpts:
How has the journey of Indian commodity exchanges been so far?
Adverse impact: FMC’s B.C. Khatua hopes that the government will reconsider its decision to impose the commodity transaction tax. Ashesh Shah / Mint
It has been highly satisfactory. The commodity futures market in the country currently comprises three national commodity exchanges and 19 regional commodity exchanges.
The total value of trade on the commodity futures markets during the fiscal year to March 2008 was Rs40.66 trillion, which is more than 60 times the trading value of about Rs66,000 crore during the fiscal year to March 2003, when the commodity futures market was liberalized.
The key drivers of this impressive growth are the national commodity exchanges, whose share in the total commodity trade during the last fiscal stands at around 97%.
At present, more than 100 commodities are available for trading in the commodity futures market and more than 50 of them are actively being traded. While bullion accounts for around 42% of the total trade value, agricultural commodities account for 23%. Of course, there is still a significant scope for development of commodity futures market in the country.
What about allowing PE and hedge funds to trade on commodity markets?
Learning from the experiences of stock markets, we strongly oppose allowing PE and hedge funds to trade in the country’s commodity markets.
Going by the investment horizon of PE and hedge funds, we think that these funds focus on commodities more as an asset class rather than treating commodity exchanges as a platform for the discovery of prices.
Though the current regulatory framework does not allow the participation of either PE and hedge funds, or Indian banks and financial institutions, we would oppose their entry if amendments to the Act that paves way for them are made.
PE and hedge funds look for maximum returns in minimum time and are responsible for the volatility in US commodity markets. Instead of PE and hedge funds, we are comfortable with Indian banks and mutual funds that have a long-term investment horizon that provides stability to the market.
What kind of measures are being initiated to curb delivery defaults in the commodity markets?
We have recently modified the penalty structure by imposing a 3% penalty. The market feedback seems to be fairly positive on that. We are of the view that increasing penalties is not the real solution. We found that when the penalties were as high as 8%, the market was getting distorted rather than serving any useful purpose of price discovery.
How do you look at the ban imposed by the government on eight agricultural commodities?
The ground realities do not justify the suspension of trading in these commodities. This has been very clearly brought out by the Abhijit Sen committee report and by the IIM Bangalore study as well. It is early stages of market evolution.
This has led to a perception in certain quarters that commodity futures market is perhaps responsible for the price rise, which, in fact, is not true.
What are the chances of the ban being lifted?
Suspension on four commodities (rubber, chana, soya oil and potato) will be lifted by November-end. Meanwhile, the prices have started softening and inflation has declined by 1.4% in the last few weeks and the trend is likely to continue in the next two months.
Commodity prices across the globe are also on the decline. I guess there will be no case for continuing the suspension. For those banned last year (wheat, rice,tur, or pigeon pea, and urad, or black gram), we will have to make out a case to the government in terms of the evolving situation.
What has been the impact of the ban on the exchanges?
The trading values in agricultural commodities have declined by more than 50%, with eight major commodities taken out of the trading list.
Except rice, the other seven commodities had a very high level of liquidity, wider market participation and good volumes. Though the overall market volumes have grown because of energy products, bullion and metals, and agri-commodity volumes have been adversely impacted.
How insulated are Indian commodity markets from the global economic meltdown?
Though the overall growth in the Indian commodity markets—at more than 47% during the first half of the year—is encouraging, the trend may slightly slow down and volumes may be modest owing to the global slowdown. We are expecting growth of at least 30% for the entire year as against 60% last year.
What about the commodity transaction tax being proposed by the government?
Nowhere in the world we have the concept of commodity transaction tax, except in the case of Taiwan, where the amount collected is a negligible $17,000 (Rs8.30 lakh) a year.
We hope the government will reconsider its decision. We are against imposing such a tax and are of the view that it will adversely impact the Indian commodity markets.