India’s two leading commodity exchanges are pitted against one another to be part of the government’s sovereign gold bond scheme, the final guidelines for which are still awaited.

The government’s draft guidelines released last month say that the gold bonds would be benchmarked to gold prices taken from National Commodity and Derivatives Exchange Ltd (NCDEX), the London Bullion Market Association (LBMA) or the Reserve Bank of India (RBI) and the rupee equivalent amount may be converted at the RBI reference rate on issue and redemption.

This has not gone down well with Multi Commodity Exchange of India Ltd (MCX), the larger rival of NCDEX, which is trying to convince the government that prices should be benchmarked to contracts traded on MCX.

In a letter to the government early last week, MCX has pointed out that there are nearly 170,000 unique clients that trade in gold contracts on its platform and that the exchange settled more than 9,000kg of gold in physical delivery in 2014-15. The average daily buy or sell orders (single-side daily volume) has been nearly 4,800 crore in 2014-15, it added.

Mint has reviewed a copy of the letter. MCX did not respond to an email query sent on Thursday.

Gold is among the top traded commodities on MCX, whereas for NCDEX, the bulk of its turnover comes from agricultural commodities. As per data from the commodities market regulator Forward Markets Commission (FMC), for the fortnight ended 31 May, gold contracts worth 39,674.61 crore were traded on MCX. The FMC fortnightly bulletin did not include NCDEX’s gold trading data as it did not feature among the top 10 traded commodities on the exchange.

NCDEX maintains that its traded contracts offer a better benchmark.

In response to an email query, an NCDEX spokesperson said that the exchange offers a bouquet of products aligned with the benchmark prices that are best suited for the government’s proposed bond scheme, which offers different denominations and tenors of investment.

The government has proposed that the bonds would be issued in denominations of 2g, 5g and 10g of gold and the tenor could be for a minimum of five to seven years.

“NCDEX gold futures contract, launched in May, has introduced an independent gold premium polling mechanism that will give the Indian market an unbiased price benchmark for the first time. With 96-97% of the price being formula based, it is the most scientific price benchmark available in the country. NCDEX gold hedge futures contract is also most aligned contract with international market which provides most transparent prices," said the NCDEX spokesperson.

The exchange has submitted its feedback to the government, highlighting certain prerequisites needed for the scheme to be successful, he said.

Even so, some commodity participants feel that MCX prices may be a better benchmark as the gold contracts traded on the exchange are more liquid. They also feel that LBMA prices should not be used as these will be subject to the impact of currency fluctuation.

“NCDEX has only around 2% market share. So, clearly liquidity is with MCX. If the government wants to give more options, then a domestic entity like India Bullion and Jewellers Association (IBJA, formerly Bombay Bullion Association) should be considered," said the commodity head of a large domestic brokerage firm.

Though NCDEX launched its gold contracts around 2003, the same time when MCX launched its contract, the former has not been able to attract liquidity, said the commodity research head of another domestic brokerage firm.

Both the people cited above declined to be identified as they have submitted their feedback to the government and the final guidelines are yet to be announced. The last date for submitting comments was 2 July.

“LBMA is a global benchmark and all other gold prices world over are its derivative. In the Indian context, MCX or IBJA should be considered. NCDEX is small in gold and so MCX prices would be more appropriate. IBJA prices can also be considered since it is a large domestic spot market of India," said Sudip Bandyopadhyay, managing director and chief executive officer of Destimoney Securities Pvt. Ltd.

While market participants differ on how the bonds should be priced, they are unanimous on the importance and the utility of the proposed product.

Naveen Mathur, associate director of commodities and currencies at Angel Broking Ltd, says that while physical gold will never lose its appeal for Indian investors, over a period of time, interest in products such as gold bonds will increase.

Finance minister Arun Jaitley, while presenting the 2015-16 budget, said that India is one of the largest consumers of gold with annual imports in the range of 800-1,000 tonnes of physical gold that is neither traded nor monetized. He proposed a sovereign gold bond scheme as an alternative to purchasing physical gold.

“Sovereign gold bond is a good product and is in line with the government’s strategic objective of reducing gold imports and thereby the deficit. It should work as there would be many investors who would be interested in such a product," said Suresh Nair, director, ADMISI Commodities Pvt Ltd, the Indian arm of UK-based investment brokerage firm ADM Investor Services International.

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