New Delhi: Investor R.K. Gupta says he took a right decision when he started trading in commodities a year ago.
Gupta, who began investing in the stock market some seven years back, says equity markets with their volatile trades are not easy to live with.
Renewed focus: Traders at MCX in Mumbai. Statistics show that volumes in commodities markets have been rising since February. Photograph: Amit Bhargava / Bloomberg
As a result, “I mostly trade in gold and other metals, prices of which are determined internationally and are much more stable,” he insists. “In the Indian stock exchanges, one can lose money in even the best known blue-chip company as volatility plays a much bigger role than the company’s strong fundamentals.”
Increasingly, Gupta is not alone in coming to this conclusion even if it is not necessarily empirically valid across commodities and markets. Investors are increasingly putting more of their money in commodities as the equities market in India goes through a prolonged downturn.
Futures trading in July at the country’s two main commodity exchanges—Multi Commodity Exchange of India Ltd, or MCX, and National Commodity and Derivatives Exchange Ltd, or NCDEX—have more than doubled over year-ago July. In comparison, futures and options trading at National Stock Exchange, or NSE, rose on 38%, data available with the bourses show.
On 15 July, a combined MCX and NCDEX saw the highest average daily turnover of Rs31,090 crore in a year. On 16 July last year, the cumulative trade amounted to some Rs9,434 crore. Statistics for the last one year also show volumes in commodities markets have been rising since February, when the stock markets slowed down.
“Commodities’ prices are generally perceived to be negatively correlated with equity prices and analyses show with a fall in volumes in NSE F&O, we have seen a rise in MCX volumes,” says Jayant Manglik, head of commodity business at brokerage Religare Commodities Ltd.“Falling equity prices and volumes have led to renewed focus on scientific asset allocation by investors and traders. Most large firms are putting 10-30% of their investible surplus in commodities as against 5% earlier and have managed handsome returns.”
For investor Gupta, trading in gold has an additional benefit. “While in gold I will have to spend only 4% as margin but in a scrip like Ranbaxy or Reliance Industries, it would be anywhere between 25% and 30%,” he says. “With the money I save in paying margin, I can do more trades in gold.” Margins are taken by commodity exchanges before a trade is initiated to cover price risks.
Manglik says the bull run in the commodity market is here to stay and low upfront margins compared with stock markets will help investors stay with commodities.
A senior official at NCDEX, who didn’t want to be identified, is more practical.
“This is a game of opportunity. Since investors and traders are seeing major opportunities in the commodity markets, a lot of them have diversified to this market. However, it is difficult to say whether they will have long-term commitment to this market,” he said.
Joseph Massey, chief executive officer and managing director of MCX, declined to comment for this article.
Shyamal Gupta, head of institutional business at Kotak Commodity Services Ltd, says that speculative capital in any market is temporary. “Electronic market all over the world is driven by hot speculative capital,” he said.
“The capital deployment over asset class and geography is not a long-term phenomenon but done with the short-term objective of high returns, high velocity and high risk. The jump in the volume has been contributed mainly by the price of crude going up. This has also attracted speculative volume in the market.”
Kotak’s Gupta, however, doesn’t agree lower margins will keep investors interest intact. “The sudden fall in gold and silver demonstrates that low margins do not necessarily mean large opportunity,” he says. “It all depends on which side of the market one really is.”
Shailendra Kumar, head of Commodity Research Group, a Mumbai-based outfit that advises traders and investors, maintains that opportunities in the commodities are here to stay.
“Commodity market has seen a lot of new investors as volumes in commodities such as gold, crude oil, wheat (on Chicago Board of Trade) and silver ruled high between January and March,” says Kumar.
“Gold, which was selling at $825 an ounce on 2 January, reached $1,025 an ounce on 17 March, a 25% increase in 100 days. It will outperform Nifty in the next five years even though in the last three weeks prices of gold and silver have been going down.”
The S&P CNX Nifty is the 50-share benchmark index on NSE. To be sure, the surge in the commodities market may not last long as the government gears up to notify the commodities transaction tax, or CTT. Some officials say this will be the test of serious investors in commodities.
CTT, which would apply when a commodity derivative is sold, mirrors the securities transaction tax, or STT, including a provision to offset the tax paid from the trader’s profit.
The government announced CTT in the national budget for 2008-09 but is yet to notify it, partly because of lobbying by the commodities exchanges that maintain that the tax would increase transaction costs eightfold and make the commodity bourses uncompetitive.
However, Saroj Bala, member (revenue) at the Central Board of Direct Taxes, says one of the aims of CTT is to create a trail that would allow the government to find out the source of funds deployed in commodities’ markets. Mint reported on 8 March that finance ministry is of the view that once a trail is established through CTT, it would help income-tax department check general tax evasion.
“These (notification of CTT rules) might be in the process of getting formulated,” Bala said on 20 August at an industry conference. She had then said the effective tax rate on a transaction might be Rs11 for every transaction of Rs1 lakh compared with Rs17 proposed in the Budget, as credit is allowed to be taken while calculating final tax liability.
Also, participants in commodities exchanges who physically deliver the underlying commodity will not be required to pay CTT. Instead, it will apply to only those transactions where the settlement is in cash, she had said.