Summer Internship Project Report on STUDY OF OPERTAIONS OF VARIOUS FINANCIAL MARKET WITH SPECIAL EMPHASIS ON COMMODITY MARKET IN INDIA

By Siddharth Agarwal A0101912142 MBA Class of 2014 Under the supervision of Ms. Swati Bhatnagar Assistant Professor Department of Marketing In Partial Fulfillment of the Requirements for the Degree of Masters of Business Administration at AMITY BUSINESS SCHOOL AMITY UNIVERSITY UTTARPRADESH SECTOR 125, NOIDA-201303,UTTARPRADESH, INDIA
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DECLARATION

Title of Project Report Study Of Operations Of Various Financial Market With Special Emphasis On Commodity Market In India

I declare (a)That the work presented for assessment in this Summer Internship Report is my own, that it has not previously been presented for another assessment and that my debts (for words, data, arguments and ideas) have been appropriately acknowledged (b)That the work conforms to the guidelines for presentation and style set out in the relevant documentation.

Date: Siddharth Agarwal A0101912142 MBA class of 2014

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CERTIFICATE

I Ms. Swati Bhatnagar hereby certify that Siddharth Agarwal student of Masters of Business Administration at Amity Business School, Amity University Uttar Pradesh has completed the Project Report on Study of operations of various financial markets with special emphasis on commodity market in India.

Ms. Swati Bhatnagar Assistant Professor Department of Marketing

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CERTIFICATE FROM ORGANIZATION

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ACKNOWLEDGEMENT

An undertaking of work life - this is never an outcome of a single person; rather it bears the imprints of a number of people who directly or indirectly helped me in completing the present study. I would be failing in my duties if I don't say a word of thanks to all those who made my training period educative and pleasurable one. I am thankful to INDIAINFOLINE LIMITED, DELHI for giving me an opportunity to do summer training in the company. First of all, I am extremely grateful to Mr. Ashwani kumar (Associate vice president) for his guidance, encouragement and tutelage during the course of the internship despite his extremely busy schedule. My very special thanks to him for giving me the opportunity to do this project and for his support throughout as a mentor. I must also thank my faculty guide Ms. Swati Bhatnagar (Faculty, Amity Business School) for her continuous support, mellow criticism and able directional guidance during the project. I would also like to thank all the respondents for giving their precious time and relevant information and experience, I required, without which the Project would have been incomplete. Finally I would like to thank all lecturers, friends and my family for their kind support and to all who have directly or indirectly helped me in preparing this project report. And at last I am thankful to all divine light and my parents, who kept my motivation and zest for knowledge always high through the tides of time.

TABLE OF CONTENTS
Chapter 1: Introduction to Company..1 1.1 Introduction to Derivatives ..4 1.1.2 Products, Participants and Functions..5 1.1.3 Economic function performed with the help of derivative market.6 1.1.4 Types of derivative market.7 1.1.5 Difference between commodity and financial derivative...9 1.1.6 Quality of underlying Assets.11 1.2 Introduction to Commodity Market11 1.2.1 History of evolution of commodity market....15 1.2.2 History of commodity market in India...16 1.2.3 Legal framework for regulatory commodity futures in India.18 1.2.4 How commodity market works...22 1.2.5 Current scenario in Indian commodity market...23 Chapter 2: Literature Review.32 Chapter 3: Research methodology.36 Chapter 4: Analysis and Interpretations.39 Chapter 5: Conclusion and Recommendations..56 References..59 Annexure61

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List of Tables
1.1 Commodity exchange in India and commodities traded21 1.2 Commodity futures trade in India...24 1.3 Volume and value of trade..26 1.4 Top commodities traded on MCX..27 1.5 Top commodities traded on NCDEX.28 1.6 Top commodities traded on NCME...29 1.7 Top commodities traded on ICEX.30 1.8 Top commodities traded on ACE...31

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List of Graphs
4.1 Analysis of investors preference.40 4.2 Investor preference towards financial market.40 4.3 Investors attitude towards financial market41 4.4 Preference of investors in commodity market.42 4.5 Index preference of investors..42 4.6 Reason for resistance in commodity market43 4.7 Source of information to investors..43 4.8 Rating of investors towards various attributes ...44

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List of Figures
1.1 Indian commodity future exchange..21 1.2 Working of commodity market22

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ABSTRACT
As we know that Indian economy is an agriculture economy as around more than half of the population depends upon agriculture sector. Agriculture sector contributes a vast amount to GDP of the economy. So, India is one of the top producers of large number of commodities and also has a long history of trading in commodities and related derivatives. Commodity is any product that can be used for commerce or an article of commerce which is traded on an authorized commodity exchange is known as commodity. The article should be movable of value, something which is bought or sold and which is produced or used as the subject or barter or sale. All goods and products of agricultural (including plantation), mineral and fossil origin are allowed for commodity trading recognized under the FCRA. The national commodity exchanges, recognized by the Central Government, permits commodities which include precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and un-ginned cotton, oilseeds, oils and oilcakes, raw jute and jute goods, sugar and gur, potatoes and onions, coffee and tea, rubber and spices. Etc. The Commodities Derivatives market has seen ups and downs, but seems to have finally arrived now. The market has made enormous progress in terms of Technology, transparency and trading activity. As majority of Indian investors are not aware of organized commodity market; their perception about is of risky to very risky investment. Many of them have wrong impression about commodity market in their minds. It makes them specious towards commodity market. So the basic aim of this study is to understand the functioning of Commodity Market in India in relation to various exchanges that are available for trading under this market and current scenario of commodity market in India along with rules and regulations under this market. The study also pertains to understand the rationale or behavior of investors towards commodity market which basically aims to understand the perception of retail investors in comparison to other markets through a means of structured questionnaire.

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CHAPTER 1: INTRODUCTION

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IIFL (India Infoline group), comprising the holding company, India Infoline Ltd (NSE: INDIAINFO,BSE: 532636) and its subsidiaries, is one of one of Indias premier providers of financial services. IIFL offers advice and an execution platform for the entire range of financial services covering products ranging from loans, wealth management, asset management, insurance, fixed deposits, investment banking, equities and derivatives, commodities, Government of India bonds and other small savings instruments. It owns and manages the website, www.indiainfoline.com, which is one of Indias leading online destinations for personal finance, economy, corporate updates and equity and commodity-related updates. The company services 2.1 million customers with a team of 14,000 employees in 3,820 business locations present in eight countries. The facilities provided by IIFL are:Credit and finance: The facility is offered by subsidiaries India Infoline Finance Ltd and India Infoline Housing Finance Ltd. The diversified lending portfolio includes home loans, healthcare finance for medical equipments, SME and trader loans, secured loans against gold jewellery, commercial vehicle financing, property loans, and capital market finance secured against securities. In FY13, this segment posted an 82.10% year-on-year growth in revenues at Rs. 17.37bn. The high quality loan book of Rs. 93.75bn as on March 31, 2013 is backed by strong capital adequacy of over 20% well above the stipulated 15%. Private wealth management: In an increasingly unpredictable world, there is greater investor need for a comprehensive wealth management solution as opposed to disparate services. Under this segment, IIFL Private Wealth offers advisory services to high net worth individuals and corporate clients. It manages over Rs. 400bn of assets under advice on a client base exceeding 7,000 families. Financial products division: The Group distributes a range of financial products like insurance, mutual funds, National Pension Scheme, bonds and debentures through its extensive distribution network. The company is a leader among non-bank promoted entities in the distribution of life insurance and mutual funds. For FY13, annual premium mobilisation stood at Rs. 3.2bn. Asset management: The business was launched in 2011 with a unique proposition. The maiden scheme was, and still is, the lowest cost Nifty ETF in India. A total of six schemes have been

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launched, including four close-ended debt schemes and two open-ended equity schemes. Total Assets Under Management stands at Rs. 3.27bn as on March 31, 2013. Equity, commodities and currency: Though the contribution to revenues is less than 15%, IIFL Group continues to remain a leading online and offline broking as well as advisory services provider for cash and derivative segments directed at retail and institutional clients. Over a decade, the company has created a brand marked by informed research, systemic uptime, transaction speed, cutting-edge technology, extensive footprint, high service standards and competitive brokerage. It pioneered the concept of internet broking in India and rationalised brokerage rates from 1-1.5% in the late 90s to as low as 0.05%. The extension into commodities and currency trading reconciles with its vision to emerge as a one-stop-shop financial intermediary. Awards and recognition: IIFL has been awarded the Best Broker, India by FinanceAsia and the Most Improved Brokerage, India in the AsiaMoney polls. India Infoline was also adjudged as Fastest Growing Equity Broking House - Large firms by Dun & Bradstreet. A forerunner in the field of equity research, IIFLs research is acknowledged by none other than Forbes as Best of the Web and a must read for investors in Asia. Core strength: Research A forerunner in the field of equity research, IIFLs research is acknowledged by none other than Forbes as Best of the Web and a must read for investors in Asia. IIFL research is available not just over the Internet but also on international wire services like Bloomberg, Thomson, Dow Jones Factiva and Internet Securities. It is amongst the most read incisive pieces from among Indian brokerages. Some key milestones: On a consolidated basis, the company has posted a record all-time high income and profit for FY13. Income and profit stood at Rs. 26.7bn and Rs. 2.79bn, respectively. Some important milestones for the year gone by include loan book at Rs. 93.75bn, total borrowing at Rs. 92.2bn, capital adequacy ratio of 21.6%, net interest margin of 9.5%, net non-performing assets at 0.17% and cost to income ratio of 58.16%. The company supports employment of over 24,000 people directly and thousands more indirectly. The company services its 2.1mn customers through its network of 3,820 locations present in 900 cities, covering literally every nook and corner of the country. IIFL is physically present in key global markets includes subsidiaries in Colombo, Dubai, New York, Mauritius, London, Singapore and Hong Kong.
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It is a proud corporate citizen with cumulative contribution since inception to the exchequer of over Rs. 5 bn. The company has set an example for the peer group with its financial literacy campaign or Financial Literacy Agenda For Mass Empowerment touching more than 30mn people. IIFLs short-term debt is rated CRISIL A1+ and ICRA (A1+) by Crisil and ICRA, respectively. For the long-term, it has been rated ICRA(AA-) and CRISIL AA-/Stable indicating a high degree of safety for timely servicing of financial obligations.

1.1 Introduction To Derivatives The origin of derivatives can be traced back to the need of farmers to protect themselves against fluctuations in the price of their crop. From the time of sowing to the time of crop harvest, farmers would face price uncertainty. Through the use of simple derivative products, it was possible for the farmer to partially or fully transfer price risks by locking-in asset prices. These were simple contracts developed to meet the needs of farmers and were basically a means of reducing risk. A farmer who sowed his crop in June faced uncertainty over the price he would receive for his harvest in September. In years of scarcity, he would probably obtain attractive prices. However, during times of oversupply, he would have to dispose off his harvest at a very low price. Clearly this meant that the farmer and his family were exposed to a high risk of price uncertainty. On the other hand, a merchant with an ongoing requirement of grains too would face a price risk that of having to pay exorbitant prices during scarcity, although favorable prices could be obtained during periods of oversupply. Under such circumstances, it clearly made sense for the farmer and the merchant to come together and enter into a contract whereby the price of the grain to be delivered in September could be decided earlier. What they would then negotiate happened to be a futures-type contract, which would enable both parties to eliminate the price risk. In 1848, the Chicago Board of Trade (CBOT) was established to bring farmers and merchants together. A group of traders got together and created the `to-arrive' contract that permitted farmers to lock in to price upfront and deliver the grain later. These to-arrive contracts proved useful as a device for hedging and speculation on price changes. These were eventually standardized, and in 1925 the first futures clearing house came into existence. Today, derivative contracts exist on a variety of commodities such as corn, pepper, cotton,
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wheat, silver, etc. Besides commodities, derivatives contracts also exist on a lot of financial underlying like stocks, interest rate, exchange rate, etc. Derivates can be defined as, "A derivative is a product whose value is derived from the value of one or more underlying variables or assets in a contractual manner." The underlying asset can be equity, forex, commodity or any other asset. As earlier stated, we saw that wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the 'underlying' in this case. The Forward Contracts (Regulation) Act, 1952, regulates the forward/ futures contracts in commodities all over India. As per this Act, the Forward Markets Commission (FMC) continues to have jurisdiction over commodity forward/ futures contracts. However, when derivatives trading in securities was introduced in 2001, the term 'security' in the Securities Contracts (Regulation) Act, 1956 (SC(R)A), was amended to include derivative contracts in securities. Consequently, regulation of derivatives came under the purview of Securities Exchange Board of India (SEBI). We thus have separate regulatory authorities for securities and commodity derivative markets. Derivatives are securities under the SC(R)A and hence the trading of derivatives is governed by the regulatory framework under the SC(R)A. The Securities Contracts (Regulation) Act, 1956 defines 'derivative' to include 1. A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security. 2. A contract which derives its value from the prices, or index of prices, of underlying securities.

1.1.2 Products, Participants And Functions Derivative contracts are of different types. The most common ones are forwards, futures, options and swaps. Participants who trade in the derivatives market can be classified under the following three broad categories: hedgers, speculators, and arbitragers. 1. Hedgers: The farmer's example that we discussed about was a case of hedging. Hedgers face risk associated with the price of an asset. They use the futures or options markets to reduce or eliminate this risk.
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2.

Speculators: Speculators are participants who wish to bet on future movements in the price of an asset. Futures and options contracts can give them leverage; that is, by putting in small amounts of money upfront, they can take large positions on the market. As a result of this leveraged speculative position, they increase the potential for large gains as well as large losses.

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Arbitragers: Arbitragers work at making profits by taking advantage of discrepancy between prices of the same product across different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they would take offsetting positions in the two markets to lock in the profit.

1.1.3 Economic functions performed with the help of derivative market: Prices in an organized derivatives market reflect the perception of market participants about the future and lead the prices of underlying to the perceived future level. The prices of derivatives converge with the prices of the underlying at the expiration of the derivative contract. Thus, derivatives help in discovery of future as well as current prices. The derivatives market helps to transfer risks from those who have them but may not like them to those who have an appetite for them. Derivatives, due to their inherent nature, are linked to the underlying cash markets. With the introduction of derivatives the underlying market witnesses higher trading volumes, because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk. Speculative traders shift to a more controlled environment of the derivatives market. In the absence of an organized derivatives market, speculators trade in the underlying cash markets. Margining, monitoring and surveillance of the activities of various participants become extremely difficult in these kinds of mixed markets. An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. Derivatives have a history of attracting many bright, creative, well-educated people with an entrepreneurial attitude. They often energize others to create new businesses, new products and new employment
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opportunities, the benefit of which are immense. Derivatives markets help increase savings and investment in the long run. The transfer of risk enables market participants to expand their volume of activity

1.1.4 Types of derivative markets Derivatives markets can broadly be classified as commodity derivatives market and financial derivatives markets. As the name suggest, commodity derivatives markets trade contracts are those for which the underlying asset is a commodity. It can be an agricultural commodity like wheat, soybeans, rapeseed, cotton, etc or precious metals like gold, silver, etc. or energy products like crude oil, natural gas, coal, electricity etc. Financial derivatives markets trade contracts have a financial asset or variable as the underlying. The more popular financial derivatives are those which have equity, interest rates and exchange rates as the underlying. The most commonly used derivatives contracts are forwards, futures and options.

Spot versus Forward Transaction Every transaction has three components - trading, clearing and settlement. A buyer and seller come together, negotiate and arrive at a price. This is trading. Clearing involves finding out the net outstanding, that is exactly how much of goods and money the two should exchange. For instance, A buys goods worth Rs.100 from B and sells goods worth Rs. 50 to B. On a net basis, A has to pay Rs. 50 to B. Settlement is the actual process of exchanging money and goods. Using the example of a forward contract, let us try to understand the difference between a spot and derivatives contract. In a spot transaction, the trading, clearing and settlement happens instantaneously, i.e. 'on the spot'. Consider this example. On 1st January 2010, Aditya wants to buy some gold. The goldsmith quotes Rs. 17,000 per 10 grams. They agree upon this price and Aditya buys 20 grams of gold. He pays Rs.34,000, takes the gold and leaves. This is a spot transaction. Now suppose, Aditya does not want to buy the gold on the 1st January, but wants to buy it a month later. The goldsmith quotes Rs. 17,100 per 10 grams. They agree upon the 'forward' price for 20 grams of gold that Aditya wants to buy and Aditya leaves. A month later, he pays the goldsmith Rs. 34,200 and collects his gold. This is a forward contract, a contract by which two parties irrevocably agree to settle a trade at a future date, for a stated price and quantity. No money changes hands when the contract is signed. The exchange of money and the underlying
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goods only happens at the future date as specified in the contract. In a forward contract, the process of trading, clearing and settlement does not happen instantaneously. The trading happens today, but the clearing and settlement happens at the end of the specified period. A forward contract is the most basic derivative contract. We call it a derivative because it derives value from the price of the asset underlying the contract, in this case- gold. If on the1st of February, gold trades for Rs. 17,200 per 10 grams in the spot market, the contract becomes more valuable to Aditya because it now enables him to buy gold at Rs.17,100 per 10 grams. If however, the price of gold drops down to Rs. 16,900 per 10 grams he is worse off because as per the terms of the contract, he is bound to pay Rs. 17,100 per 10 grams for the same gold. The contract has now lost value from Adyta's point of view. Note that the value of the forward contract to the goldsmith varies exactly in an opposite manner to its value for Aditya.

Exchange Traded Versus OTC Derivatives Derivatives have probably been around for as long as people have been trading with one another. Forward contracting dates back at least to the 12th century and may well have been around before then. These contracts were typically OTC kind of contracts. Over the counter (OTC) derivatives are privately negotiated contracts. Merchants entered into contracts with one another for future delivery of specified amount of commodities at specified price. A primary motivation for prearranging a buyer or seller for a stock of commodities in early forward contracts was to lessen the possibility that large swings would inhibit marketing the commodity after a harvest Later many of these contracts were standardized in terms of quantity and delivery dates and began to trade on an exchange. The OTC derivatives markets have the following features compared to exchange-traded derivatives: 1. The management of counter-party (credit) risk is decentralized and located within individual institutions. 2. 3. 4. There are no formal centralized limits on individual positions, leverage, or margining. There are no formal rules for risk and burden-sharing. There are no formal rules or mechanisms for ensuring market stability and integrity, and for safeguarding the collective interests of market participants. 5. The OTC contracts are generally not regulated by a regulatory authority and the
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exchange's self-regulatory organization, although they are affected indirectly by national legal systems, banking supervision and market surveillance.

The derivatives markets have witnessed rather sharp growth over the last few years, which have accompanied the modernization of commercial and investment banking and globalization of financial activities. The recent developments in information technology have contributed to a great extent to these developments. While both exchange-traded and OTC derivative contracts offer many benefits, the former have rigid structures compared to the latter. The largest OTC derivative market is the inter-bank foreign exchange market. Commodity derivatives, the world over are typically exchange-traded and not OTC in nature.

1.1.5 Difference Between Commodity And Financial Derivatives The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity or a financial asset. However, there are some features which are very peculiar to commodity derivative markets. In the case of financial derivatives, most of these contracts are cash settled. Since financial assets are not bulky, they do not need special facility for storage even in case of physical settlement. On the other hand, due to the bulky nature of the underlying assets, physical settlement in commodity derivatives creates the need for warehousing. Similarly, the concept of varying quality of asset does not really exist as far as financial underlying are concerned. However, in the case of commodities, the quality of the asset underlying a contract can vary largely. This becomes an important issue to be managed. We have a brief look at these issues.

Physical Settlement Physical settlement involves the physical delivery of the underlying commodity, typically at an accredited warehouse. The seller intending to make delivery would have to take the commodities to the designated warehouse and the buyer intending to take delivery would have to go to the designated warehouse and pick up the commodity. This may sound simple, but the physical settlement of commodities is a complex process. The issues faced in physical settlement are enormous. There are limits on storage facilities in different states. There are restrictions on interstate movement of commodities. Besides state level octroi and duties have an impact on the
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cost of movement of goods across locations. The process of taking physical delivery in commodities is quite different from the process of taking physical delivery in financial assets. Delivery notice period Unlike in the case of equity futures, typically a seller of commodity futures has the option to give notice of delivery. This option is given during a period identified as `delivery notice period'.

Assignment Whenever delivery notices are given by the seller, the clearing house of the Exchange identifies the buyer to whom this notice may be assigned. Exchanges follow different practices for the assignment process.

Delivery

The procedure for buyer and seller regarding the physical settlement for different types of contracts is clearly specified by the Exchange. The period available for the buyer to take physical delivery is stipulated by the Exchange. Buyer or his authorized representative in the presence of seller or his representative takes the physical stocks against the delivery order. Proof of physical delivery having been effected is forwarded by the seller to the clearing house and the invoice amount is credited to the seller's account. The clearing house decides on the delivery order rate at which delivery will be settled. Delivery rate depends on the spot rate of the underlying adjusted for discount/ premium for quality and freight costs. The discount/ premium for quality and freight costs are published by the clearing house before introduction of the contract. The most active spot market is normally taken as the benchmark for deciding spot prices.

Warehousing One of the main differences between financial and commodity derivative is the need for warehousing. In case of most exchange-traded financial derivatives, all the positions are cash settled. Cash settlement involves paying up the difference in prices between the time the contract was entered into and the time the contract was closed. For instance, if a trader buys futures on a
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stock at Rs.100 and on the day of expiration, the futures on that stock close at Rs.120, he does not really have to buy the underlying stock. All he does is take the difference of Rs.20 in cash. Similarly, the person who sold this futures contract at Rs.100 does not have to deliver the underlying stock. All he has to do is pay up the loss of Rs.20 in cash. In case of commodity derivatives however, there is a possibility of physical settlement. It means that if the seller chooses to hand over the commodity instead of the difference in cash, the buyer must take physical delivery of the underlying asset. This requires the Exchange to make an arrangement with warehouses to handle the settlements. The efficacy of the commodities settlements depends on the warehousing system available. Such warehouses have to perform the following functions: Earmark separate storage areas as specified by the Exchange for storing commodities; Ensure proper grading of commodities before they are stored; Store commodities according to their grade specifications and validity period; and Ensure that necessary steps and precautions are taken to ensure that the quantity and grade of commodity, as certified in the warehouse receipt, are maintained during the storage period. This receipt can also be used as collateral for financing. In India, NCDEX has accredited over 775 delivery centers which meet the requirements for the physical holding of goods that are to be delivered on the platform. As future trading is delivery based, it is necessary to create the logistics support for the same.

1.1.6 Quality of Underlying Assets A derivatives contract is written on a given underlying. Variance in quality is not an issue in case of financial derivatives as the physical attribute is missing. When the underlying asset is a commodity, the quality of the underlying asset is of prime importance. There may be quite some variation in the quality of what is available in the marketplace. When the asset is specified, it is therefore important that the Exchange stipulate the grade or grades of the commodity that are acceptable. Commodity derivatives demand good standards and quality assurance/ certification procedures. A good grading system allows commodities to be traded by specification. Trading in commodity derivatives also requires quality assurance and certifications from specialized agencies. In India, for example, the Bureau of Indian Standards (BIS) under the Department of Consumer Affairs specifies standards for processed agricultural commodities.
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AGMARK, another certifying body under the Department of Agriculture and Cooperation, specifies standards for basic agricultural commodities. 1.2 INTRODUCTION TO COMMODITY MARKET What is Commodity? Any product that can be used for commerce or an article of commerce which is traded on an authorized commodity exchange is known as commodity. The article should be movable of value, something which is bought or sold and which is produced or used as the subject or barter or sale. In short commodity includes all kinds of goods. Indian Forward Contracts (Regulation) Act (FCRA), 1952 defines goods as every kind of movable property other than actionable claims, money and securities. In current situation, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for commodity trading recognized under the FCRA. The national commodity exchanges, recognized by the Central Government, permits commodities which include precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and unginned cotton, oilseeds, oils and oilcakes, raw jute and jute goods, sugar and gur, potatoes and onions, coffee and tea, rubber and spices. Etc.

What is a commodity exchange? A commodity exchange is an association or a company or any other body corporate organizing futures trading in commodities for which license has been granted by regulating authority.

What is Commodity Future A Commodity futures is an agreement between two parties to buy or sell a specified and standardized quantity of a commodity at a certain time in future at a price agreed upon at the time of entering into the contract on the commodity futures exchange. The need for a futures market arises mainly due to the hedging function that it can perform. Commodity markets, like any other financial instrument, involve risk associated with frequent price volatility. The loss due to price volatility can be attributed to the following reasons: Consumer Preferences: - In the short-term, their influence on price volatility is small since it is a slow process permitting manufacturers, dealers and wholesalers to adjust their inventory in advance.

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Changes in supply: - They are abrupt and unpredictable bringing about wild fluctuations in prices. This can especially noticed in agricultural commodities where the weather plays a major role in affecting the fortunes of people involved in this industry. The futures market has evolved to neutralize such risks through a mechanism; namely hedging. The objectives of Commodity futures: Hedging with the objective of transferring risk related to the possession of physical assets through any adverse moments in price. Liquidity and Price discovery to ensure base minimum volume in trading of a commodity through market information and demand supply factors that facilitates a regular and authentic price discovery mechanism. Maintaining buffer stock and better allocation of resources as it augments reduction in inventory requirement and thus the exposure to risks related with price fluctuation declines. Resources can thus be diversified for investments. Price stabilization along with balancing demand and supply position. Futures trading leads to predictability in assessing the domestic prices, which maintains stability, thus safeguarding against any short term adverse price movements. Liquidity in Contracts of the commodities traded also ensures in maintaining the equilibrium between demand and supply. Flexibility, certainty and transparency in purchasing commodities facilitate bank financing. Predictability in prices of commodity would lead to stability, which in turn would eliminate the risks associated with running the business of trading commodities. This would make funding easier and less stringent for banks to commodity market players.

Benefits of Commodity Futures Markets:The primary objectives of any futures exchange are authentic price discovery and an efficient price risk management. The beneficiaries include those who trade in the commodities being offered in the exchange as well as those who have nothing to do with futures trading. It is because of price discovery and risk management through the existence of futures exchanges that a lot of businesses and services are able to function smoothly. 1. Price Discovery:-Based on inputs regarding specific market information, the demand and supply equilibrium, weather forecasts, expert views and comments, inflation rates, Government policies, market dynamics, hopes and fears, buyers and sellers conduct trading at futures exchanges. This transforms in to continuous price discovery
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mechanism. The execution of trade between buyers and sellers leads to assessment of fair value of a particular commodity that is immediately disseminated on the trading terminal.

2.

Price Risk Management: - Hedging is the most common method of price risk management. It is strategy of offering price risk that is inherent in spot market by taking an equal but opposite position in the futures market. Futures markets are used as a mode by hedgers to protect their business from adverse price change. This could dent the profitability of their business. Hedging benefits who are involved in trading of commodities like farmers, processors, merchandisers, manufacturers, exporters, importers etc.

3.

Import- Export competitiveness: - The exporters can hedge their price risk and improve their competitiveness by making use of futures market. A majority of traders which are involved in physical trade internationally intend to buy forwards. The purchases made from the physical market might expose them to the risk of price risk resulting to losses. The existence of futures market would allow the exporters to hedge their proposed purchase by temporarily substituting for actual purchase till the time is ripe to buy in physical market. In the absence of futures market it will be meticulous, time consuming and costly physical transactions.

4. Predictable Pricing: - The demand for certain commodities is highly price elastic. The manufacturers have to ensure that the prices should be stable in order to protect their market share with the free entry of imports. Futures contracts will enable predictability in domestic prices. The manufacturers can, as a result, smooth out the influence of changes in their input prices very easily. With no futures market, the manufacturer can be caught between severe short-term price movements of oils and necessity to maintain price stability, which could only be possible through sufficient financial reserves that could otherwise be utilized for making other profitable investments.

5. Benefits for farmers/Agriculturalists: - Price instability has a direct bearing on farmers in the absence of futures market. There would be no need to have large reserves to cover against unfavorable price fluctuations. This would reduce the risk premiums associated with the marketing or processing margins enabling more returns on produce. Storing
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more and being more active in the markets. The price information accessible to the farmers determines the extent to which traders/processors increase price to them. Since one of the objectives of futures exchange is to make available these prices as far as possible, it is very likely to benefit the farmers. Also, due to the time lag between planning and production, the market-determined price information disseminated by futures exchanges would be crucial for their production decisions.

6. Credit accessibility: - The absence of proper risk management tools would attract the marketing and processing of commodities to high-risk exposure making it risky business activity to fund. Even a small movement in prices can eat up a huge proportion of capital owned by traders, at times making it virtually impossible to pay back the loan. There is a high degree of reluctance among banks to fund commodity traders, especially those who do not manage price risks. If in case they do, the interest rate is likely to be high and terms and conditions very stringent. This posses a huge obstacle in the smooth functioning and competition of commodities market. Hedging, which is possible through futures markets, would cut down the discount rate in commodity lending.

7. Improved product quality: - The existence of warehouses for facilitating delivery with grading facilities along with other related benefits provides a very strong reason to upgrade and enhance the quality of the commodity to grade that is acceptable by the exchange. It ensures uniform standardization of commodity trade, including the terms of quality standard: the quality certificates that are issued by the exchange-certified warehouses have the potential to become the norm for physical trade.

History of Evolution of commodity markets Commodities future trading was evolved from need of assured continuous supply of seasonal agricultural crops. The concept of organized trading in commodities evolved in Chicago, in 1848. But one can trace its roots in Japan. In Japan merchants used to store Rice in warehouses for future use. To raise cash warehouse holders sold receipts against the stored rice. These were known as rice tickets. Eventually, these rice tickets become accepted as a kind of commercial currency. Latter on rules came in to being, to standardize the trading in rice tickets. In 19 th century Chicago in United States had emerged as a major commercial hub. So that wheat producers from Mid-west attracted here to sell their produce to dealers & distributors. Due to
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lack of organized storage facilities, absence of uniform weighing & grading mechanisms producers often confined to the mercy of dealers discretion. These situations lead to need of establishing a common meeting place for farmers and dealers to transact in spot grain to deliver wheat and receive cash in return. Gradually sellers & buyers started making commitments to exchange the produce for cash in future and thus contract for futures trading evolved. Whereby the producer would agree to sell his produce to the buyer at a future delivery date at an agreed upon price. In this way producer was aware of what price he would fetch for his produce and dealer would know about his cost involved, in advance. This kind of agreement proved beneficial to both of them. As if dealer is not interested in taking delivery of the produce, he could sell his contract to someone who needs the same. Similarly producer who not intended to deliver his produce to dealer could pass on the same responsibility to someone else. The price of such contract would dependent on the price movements in the wheat market. Latter on by making some modifications these contracts transformed in to an instrument to protect involved parties against adverse factors such as unexpected price movements and unfavorable climatic factors. This promoted traders entry in futures market, which had no intentions to buy or sell wheat but would purely speculate on price movements in market to earn profit. Trading of wheat in futures became very profitable which encouraged the entry of other commodities in futures market. This created a platform for establishment of a body to regulate and supervise these contracts. Thats why Chicago Board of Trade (CBOT) was established in 1848. In 1870 and 1880s the New York Coffee, Cotton and Produce Exchanges were born. Agricultural commodities were mostly traded but as long as there are buyers and sellers, any commodity can be traded. In 1872, a group of Manhattan dairy merchants got together to bring chaotic condition in New York market to a system in terms of storage, pricing, and transfer of agricultural products. In 1933, during the Great Depression, the Commodity Exchange, Inc. was established in New York through the merger of four small exchanges the National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the New York Hide Exchange. The largest commodity exchange in USA is Chicago Board of Trade, The Chicago Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity Exchange and New York Coffee, sugar and cocoa Exchange. Worldwide there are major futures trading exchanges in over twenty countries including Canada, England, India, France, Singapore, Japan, Australia and New Zealand.
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History of Commodity Market in India:The Commodity Futures market in India dates back to more than a century. The first organized futures market was established in 1875, under the name of Bombay Cotton Trade Association to trade in cotton derivative contracts. This was followed by institutions for futures trading in oilseeds, food grains, etc. The futures market in India underwent rapid growth between the period of First and Second World War. As a result, before the outbreak of the Second World War, a large number of commodity exchanges trading futures contracts in several commodities like cotton, groundnut, groundnut oil, raw jute, jute goods, castor seed, wheat, rice, sugar, precious metals like gold and silver were flourishing throughout the country. In view of the delicate supply situation of major commodities in the backdrop of war efforts mobilization, futures trading came to be prohibited during the Second World War under the Defence of India Act. After Independence, especially in the second half of the 1950s and first half of 1960s, the commodity futures trading again picked up and there were thriving commodity markets. However, in mid-1960s, commodity futures trading in most of the commodities was banned and futures trading continued in two minor commodities, viz, pepper and turmeric. The history of organized commodity derivatives in India goes back to the nineteenth century when Cotton Trade Association started futures trading in 1875, about a decade after they started in Chicago. Over the time datives market developed in several commodities in India. Following Cotton, derivatives trading started in oilseed in Bombay (1900), raw jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920). However many feared that derivatives fuelled unnecessary speculation and were detrimental to the healthy functioning of the market for the underlying commodities, resulting in to banning of commodity options trading and cash settlement of commodities futures after independence in 1952. The parliament passed the Forward Contracts (Regulation) Act, 1952, which regulated contracts in Commodities all over the India. The act prohibited options trading in Goods along with cash settlement of forward trades, rendering a crushing blow to the commodity derivatives market. Under the act only those associations/exchanges, which are granted reorganization from the Government, are allowed to organize forward trading in regulated commodities. The act envisages three tire regulations: (i) Exchange which organizes forward trading in commodities can regulate trading on day-to-day basis; (ii) Forward Markets Commission provides regulatory oversight under the powers delegated to it by the central Government. (iii) The Central

xxix

Government- Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution- is the ultimate regulatory authority. The commodities future market remained dismantled and remained dormant for about four decades until the new millennium when the Government, in a complete change in a policy, started actively encouraging commodity market. After Liberalization and Globalization in 1990, the Government set up a committee (1993) to examine the role of futures trading. The Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17 commodity groups. It also recommended strengthening Forward Markets Commission, and certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing option trading in goods and registration of brokers with Forward Markets Commission. The Government accepted most of these recommendations and futures trading was permitted in all recommended commodities. It is timely decision since internationally the commodity cycle is on upswing and the next decade being touched as the decade of Commodities. Commodity exchange in India plays an important role where the prices of any commodity are not fixed, in an organized way. Earlier only the buyer of produce and its seller in the market judged upon the prices. Others never had a say. Today, commodity exchanges are purely speculative in nature. Before discovering the price, they reach to the producers, end-users, and even the retail investors, at a grassroots level. It brings a price transparency and risk management in the vital market. A big difference between a typical auction, where a single auctioneer announces the bids and the Exchange is that people are not only competing to buy but also to sell. By Exchange rules and by law, no one can bid under a higher bid, and no one can offer to sell higher than someone elses lower offer. That keeps the market as efficient as possible, and keeps the traders on their toes to make sure no one gets the purchase or sale before they do. Since 2002, the commodities future market in India has experienced an unexpected boom in terms of modern exchanges, number of commodities allowed for derivatives trading as well as the value of futures trading in commodities, which crossed $ 1 trillion mark in 2006. Since 1952 till 2002 commodity datives market was virtually non- existent, except some negligible activities on OTC basis. In India there are 25 recognized future exchanges, of which there are three national level multicommodity exchanges. After a gap of almost three decades, Government of India has allowed forward transactions in commodities through Online Commodity Exchanges, a modification of traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of commodities. The three exchanges are: National Commodity & Derivatives
xxx

Exchange Limited (NCDEX) Mumbai, Multi Commodity Exchange of India Limited (MCX) Mumbai and National Multi-Commodity Exchange of India Limited (NMCEIL)

Ahmedabad.There are other regional commodity exchanges situated in different parts of India.

Legal framework for regulating commodity futures in India:The commodity futures traded in commodity exchanges are regulated by the Government under the Forward Contracts Regulations Act, 1952 and the Rules framed there under. The regulator for the commodities trading is the Forward Markets Commission, situated at Mumbai, which comes under the Ministry of Consumer Affairs Food and Public Distribution

Forward Markets Commission (FMC):It is statutory institution set up in 1953 under Forward Contracts (Regulation) Act, 1952. Commission consists of minimum two and maximum four members appointed by Central Govt. Out of these members there is one nominated chairman. All the exchanges have been set up under overall control of Forward Market Commission (FMC) of Government of India. There are 21 Commodity Exchanges (15 Regional and 6 National Exchanges) regulating futures trading in commodities under the purview of the Forward Markets Commission (FMC). The country's commodity futures exchanges are divided majorly into two categories:

National exchanges Regional exchanges

The Five exchanges operating at the national level (as on ) are: i) ii) iii) iv) National Commodity and Derivatives Exchange of India Ltd. (NCDEX) National Multi Commodity Exchange of India Ltd. (NMCE) Multi Commodity Exchange of India Ltd. (MCX) Indian Commodity Exchange Ltd. (ICEX) which started trading operations on November 27, 2009 v) ACE Derivatives and Commodity Exchange

The leading regional exchange is the National Board of Trade (NBOT) located at Indore. There are more than 15 regional commodity exchanges in India.

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National Commodities & Derivatives Exchange Limited (NCDEX) National Commodities & Derivatives Exchange Limited (NCDEX) promoted by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank of Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSC). Punjab National Bank (PNB), Credit Rating Information Service of India Limited (CRISIL), Indian Farmers Fertilizer Cooperative Limited (IFFCO), Canara Bank and Goldman Sachs by subscribing to the equity shares have joined the promoters as a share holder of exchange. NCDEX is the only Commodity Exchange in the country promoted by national level institutions. NCDEX is a public limited company incorporated on 23 April 2003. NCDEX is a national level technology driven on line Commodity Exchange with an independent Board of Directors and professionals not having any vested interest in Commodity Markets. It is committed to provide a world class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency. NCDEX is regulated by Forward Markets Commission (FMC). NCDEX is also subjected to the various laws of land like the Companies Act, Stamp Act, Contracts Act, Forward Contracts Regulation Act and various other legislations. NCDEX is located in Mumbai and offers facilities to its members in more than 550 centers throughout India. NCDEX currently facilitates trading of 57 commodities.

Multi Commodity Exchange of India Limited (MCX) Multi Commodity Exchange of India Limited (MCX) is an independent and de-mutulized exchange with permanent reorganization from Government of India, having Head Quarter in Mumbai. Key share holders of MCX are Financial Technologies (India) Limited, State Bank of India, Union Bank of India, Corporation Bank of India, Bank of India and Canara Bank. MCX facilitates online trading, clearing and settlement operations for commodity futures market across the country. MCX started of trade in Nov 2003 and has built strategic alliance with Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors Association of India, pulses Importers Association and Shetkari Sanghatana.MCX deals with about 100 commodities.

National Multi Commodity Exchange of India Limited (NMCEIL) National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-mutualised Electronic Multi Commodity Exchange in India. On 25th July 2001 it was granted approval by
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Government to organize trading in edible oil complex. It is being supported by Central warehousing Corporation Limited, Gujarat State Agricultural Marketing Board and Neptune Overseas Limited. It got reorganization in Oct 2002. NMCEIL Head Quarter is at Ahmedabad. Some of the features of national and regional exchanges are listed below: National Exchanges Compulsory online trading Transparent trading Exchanges to be de-mutualised Exchange recognized on permanent basis Multi commodity exchange Large expanding volumes

Regional Exchanges Online trading not compulsory De-mutualisation not mandatory Recognition given for fixed period after which it could be given for re regulation Generally, these are single commodity exchanges. Exchanges have to apply for trading each commodity. Low volumes in niche markets

Figure 1.1

Table 1.1 Commodity Exchanges in India and commodities traded

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No. Exchanges 1 Multi Commodity Exchange of India Ltd., Mumbai*

Main Commodities Gold, Silver, Copper, Crude Oil, Zinc, Lead, Nickel, Natural gas, Aluminium, Mentha Oil, Crude_Palm_Oil, Refined Soya Oil, Cardamom, Guar Seeds, Kapas, Potato, Chana\Gram, Melted Menthol Flakes, Almond, Wheat, Barley, Long Steel, Maize, Soybean Seeds, Gasoline US, Tin, Kapaskhali, Platinum, Heating Oil Guar Seed, Soy Bean, Soy Oil, Chana,RM Seed, Jeera, Turmeric, Guar Gum, Pepper, Cotton Cake, Long Steel, Gur, Kapas, Wheat, Red Chilli, Crude Oil, Maize, Gold, Copper, Castor Seeds, Potato, Barley, Kachhi Ghani Mustard Oil, Silver, Indian 28 Mm Cotton, Platinum

2 National Commodity & Derivatives Exchange Ltd, Mumbai*

3 National Multi Commodity Rape/Mustard Seed, Guar Seeds, Nickel, Jute, Refined Exchange of India Soya Oil, Zinc, Rubber, Chana\Gram, Isabgul, Lead, Gold, Limited, Ahmedabad* Aluminium, Copper, Turmeric, Copra, Silver, Raw Jute, Guar Gum, Pepper, Coffee Robusta, Castor Seeds, Mentha Oil

How Commodity market works? There are two kinds of trades in commodities. The first is the spot trade, in which one pays cash and carries away the goods. The second is futures trade. The underpinning for futures is the warehouse receipt. A person deposits certain amount of say, good X in a ware house and gets a warehouse receipt. Which allows him to ask for physical delivery of the good from the warehouse. But someone trading in commodity futures need not necessarily posses such a receipt to strike a deal. A person can buy or sale a commodity future on an exchange based on his expectation of where the price will go. Futures have something called an expiry date, by when the buyer or seller either closes (square off) his account or give/take delivery of the commodity. The broker maintains an account of all dealing parties in which the daily profit or loss due to
xxxiv

changes in the futures price is recorded. Squiring off is done by taking an opposite contract so that the net outstanding is nil. For commodity futures to work, the seller should be able to deposit the commodity at warehouse nearest to him and collect the warehouse receipt. The buyer should be able to take physical delivery at a location of his choice on presenting the warehouse receipt. But at present in India very few warehouses provide delivery for specific commodities. Figure 1.2 Following diagram gives a fair idea about working of the Commodity market.

Today Commodity trading system is fully computerized. Traders need not visit a commodity market to speculate. With online commodity trading they could sit in the confines of their home or office and call the shots.

The commodity trading system consists of certain prescribed steps or stages as follows: I. Trading: - At this stage the following is the system implementedOrder receiving Execution Matching Reporting Surveillance Price limits Position limits
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II. Clearing: - This stage has following system in placeMatching Registration Clearing Clearing limits Notation Margining Price limits Position limits Clearing house.

III. Settlement: - This stage has following system followed as followsMarking to market Receipts and payments Reporting Delivery upon expiration or maturity.

Current Scenario in Indian Commodity Market Need of Commodity Derivatives for India:India is among top 5 producers of most of the Commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22% GDP of Indian economy. It employees around 57% of the labor force on total of 163 million hectors of land Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a major centre for trading of commodity derivatives.

Table 1.2 Commodity Futures Trade in India (Rs Lakhs Crores) Category Total Bullion Agro Metals Energy for April to February FY2012-13 157.828 73.26 20.203 29.951 34.4

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According to Forward Markets Commission (FMC), the value of commodities traded from April to February 15, 2011-12 was recorded at Rs 159.324 lakh crore in comparison to the value of commodities traded from April to February FY 2012-13 was recorded at Rs 157.828 lakh crore, suggesting decline in trading activity in 2012-13. Trends in volume contribution on the three National Exchanges:Pattern on Multi Commodity Exchange (MCX):MCX is currently largest commodity exchange in the country in terms of trade volumes, further it has even become the third largest in bullion and second largest in silver future trading in the world. Coming to trade pattern, though there are about 100 commodities traded on MCX, only 3 or 4 commodities contribute for more than 80 percent of total trade volume. As per recent data the largely traded commodities are Gold, Silver, Energy and base Metals. Incidentally the futures trends of these commodities are mainly driven by international futures prices rather than the changes in domestic demand-supply and hence, the price signals largely reflect international scenario. Among Agricultural commodities major volume contributors include Gur, Urad, Menthol Oil etc. Whose market sizes are considerably small making then vulnerable to manipulations. MCX is Indias leading commodity futures exchange with a market share of 87.3 per cent in terms of the value of commodity futures contracts traded in FY 2012-13. The Exchange was the third largest commodity futures exchange in the world, in terms of the number of contracts traded in CY2012, based on the Futures Industry Associations annual volume survey released in March 2013. Moreover, as per the survey, during CY 2012, MCX was the world's largest exchange in silver and gold futures, second largest in copper and natural gas futures, and the third largest in crude oil futures. MCX has forged strategic alliances with leading international exchanges such as CME Group, London Metal Exchange (LME), Shanghai Futures Exchange (SHFE) and Taiwan Futures Exchange (TAIFEX). The Exchange has also tied-up with various trade bodies, corporate, educational institutions and R&D centers across the country. These alliances enable the Exchange in improving trade practices, increasing awareness, and facilitating overall improvement of commodity futures market.

Pattern on National Commodity & Derivatives Exchange (NCDEX):NCDEX is the second largest commodity exchange in the country after MCX. However the major volume contributors on NCDEX are agricultural commodities. But, most of them have common inherent problem of small market size, which is making them vulnerable to market

xxxvii

manipulations and over speculation. About 60 percent trade on NCDEX comes from guar seed, channa and Urad (narrow commodities as specified by FMC).

Pattern on National Multi Commodity Exchange (NMCE):NMCE is third national level futures exchange that has been largely trading in Agricultural Commodities. Trade on NMCE had considerable proportion of commodities with big market size as jute rubber etc. But, in subsequent period, the pattern has changed and slowly moved towards commodities with small market size or narrow commodities. Analysis of volume contributions on three major national commodity exchanges reveled the following pattern, Major volume contributors: - Majority of trade has been concentrated in few commodities that are Non Agricultural Commodities (bullion, metals and energy) Agricultural commodities with small market size (or narrow commodities) like guar, Urad, Menthol etc. As of March 2012, futures trading in urad, tur and rice remain suspended. During the period under review (January 2013 to March 2013), the total value of trade in all commodities traded at the recognized Exchanges was `40.84 lakh crore as against `41.99 lakh crore during the previous quarter (October 2012 to December 2012) and `44.03 lakh crore during the corresponding period of last year. The five major commodity exchanges contributed 99.63 % to the total value of trade in the Commodity futures market. These are MCX, Mumbai (88.31 %), NCDEX, Mumbai (7.15 %), NMCE, Ahmedabad (1.52 %), ICEX, Mumbai (1.83 %), and ACE Derivatives and Commodity Exchange Ltd., Mumbai (0.82%).

Table 1.3 Total volume and value of trade during the quarter (January 2013 to March 2013) in the major commodity exchanges Volume of Name of Exchange Trade (In lakh tons)
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Value (` in

% share (In value

Crore)

terms)

Multi Commodity Exchange of India Ltd., Mumbai National Commodity & Derivatives Exchange Ltd., Mumbai National Multi Commodity Exchange of India Ltd., Ahmedabad Indian Commodity Exchange Ltd., Mumbai ACE Derivatives & Commodity Exchange Ltd., Mumbai Total of top 5 exchanges

2284.77

3606867.16

88.31

678.79

292014.68

7.15

84.21

61967.85

1.52

136.08

75131.51

1.83

56.20

33428.45

0.82

3240.05

4069409.65

99.63

Others

32.24

14982.82

0.37

Grand total

3272.29

4084392.47

100.00

Note: Natural Gas volumes are not included in the Total Volume

During the period under review Silver, Gold, Crude Oil, Copper, Natural Gas, Lead, Zinc & Nickel contracts constituted a major share of the value of commodities traded at the MCX, Mumbai. The following table indicates the % share of major commodities traded at MCX, Mumbai, during the period under review. Table 1.4 Top commodities traded on MCX during the quarter (January 2013 to March 2013)
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Commodities

Total value % share to the total value (In ` crores)

SILVER GOLD CRUDEOIL COPPER NATURAL GAS LEAD ZINC NICKEL

936279.660 906262.427 653661.839 293087.998 221621.380 212341.570 137550.888 101419.834

25.96 25.13 18.12 8.13 6.14 5.89 3.81 2.81 95.99 4.01 100.00

Total of major commodities 3462225.596 Other commodities Total 144641.563 3606867.158

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During the period under review Soy Oil, Soya Bean, Castor Seed, Dhaniya, R/M Seed, Chana, Cotton Seed Oil Cake, Kapas, Jeera & Turmeric constituted a major share of the value of commodities traded at the NCDEX, Mumbai.The following table indicates the % share of major commodities traded at NCDEX, Mumbai during the period under review. Table 1.5 Top commodities traded on NCDEX during the quarter (January 2013 to March 2013) Commodities Total value (In `crores) SOYA_OIL SOYABEAN CASTOR_SEED DHANIYA R/M SEED CHANA COTTON_CAKE KAPAS JEERA TURMERIC 101121.123 39302.174 24150.850 22826.798 17693.340 16396.567 15867.319 13025.696 10493.146 10022.351 34.63 13.46 8.27 7.82 6.06 5.61 5.43 4.46 3.59 3.43 92.769 7.23 100.00 % share to the total value

Total of major commodities 270899.364 Other commodities Total 21115.320 292014.684

41

During the period under review Raw Jute, coffee Rep Bulk, Nickel, copper and Lead constituted a major share of the value of commodities traded at the NMCE, Ahmedabad. The following table indicates the % share of major commodities traded at NMCE, Ahmedabad during the period under review. Table 1.6 Top commodities traded on NMCE during the quarter (January 2013 to March 2013) % share to the Commodities Total Value in `Crore total value RAW JUTE COFFEE REP BULK NICKEL COPPER LEAD Total of Major Commodities Others Commodities Total 24236.99 37730.86 61967.851 39.11 60.89 100.00 5992.41 5633.35 4223.85 4236.62 4150.76 9.67 9.09 6.82 6.84 6.70

42

During the period under review Natural Gas, Crude Oil, Silver, Copper, Iron ore, Lead, & Gold constituted a major share of the value of commodities traded at the ICEX, Mumbai. The following table indicates the % share of major commodities traded at ICEX, Mumbai during the period under review. Table 1.7 Top commodities traded on ICEX during the quarter (January 2013 to March 2013) Commodities Total value % share to the total value (In ` crores) NATURAL GAS CRUDEOIL SILVER COPPERCATHODE IRONORE62FINES LEAD GOLD Total of major 75117.621 13.883 75131.504 99.98 0.02 100.00 29145.559 12037.273 8992.213 8785.815 7554.096 5977.320 2625.347 38.79 16.02 11.97 11.69 10.05 7.96 3.49

commodities Other commodities Total

Note: Natural Gas volumes are not included in the Total Volume

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During the period under review Soy Oil, RBD, Soya Meal & Cotton constituted a major share of the value of commodities traded at the ACE, Mumbai. The following table indicates the % share of major commodities traded at ACE, Mumbai during the period under review. Table 1.8 Top commodities traded on ACE during the quarter (January 2013 to March 2013) Total value Commodities (In `crores) REFSOYOIL RBD SOYMEAL COTTON118 Total of major 31777.758 commodities Other commodities Total 1650.690 33428.448 4.94 100.00 95.06 23916.861 2905.998 2499.456 2455.443 Value 71.55 8.69 7.48 7.35 % share to the total

44

45

Chapter 2: Literature Review

46

(UNCTAD,5 June 2011) ,The major findings in this article was laid on the functioning of commodity markets and the flow of information that affect the trading decisions. The paper also summarizes the recent developments and trends in fundaments on both the demand and supply side. They have urged that due to increase in the number of investors in commodity market who do not base their trading purely on the basis of demand and supply has lead to misleading price signals in the market . Another finding in this paper was that investors want to diversify their portfolio which is playing an important role for them to invest in commodity market rather than understanding the fundamentals for investment.

(Ke Tang and Wei Xiong, March 2011),The primary objective of this paper was to find out the effect growing investment in commodity futures markets has had on commodity price co-movements. In order to find out the relationship between the two the authors conducted a regression test between the oil and selected commodities from various sectors and the major finding was that with the increase in investment by investors observed since the early 2000s futures prices of non-energy commodities have become increasingly correlated with oil.

(John Baffes and Tassos Haniotis ,July 2010),The main objective of this paper was to analyze three potentially key factors behind recent commodity price increases: excess liquidity and speculation, increasing food demand by emerging economies and the use of some food commodities for biofuel production. The major findings in this paper was speculation played a key role during the 2008 price rise whereas the use of some food commodities for biofuel production played a small role and the increase in food demand by emerging economies played no noticeable role.

(Lutz Kilian and Dan Murphy, 16 March 2010), The main objective of this study was to develop a structural vector autoregressive (VAR) model of the global oil market. The major findings of this study was that the increase in oil prices observed from 2003 to 2008 was caused by fluctuations in the flow demand for oil driven by the global business cycle. The model also suggests that speculative trading played an important role during oil price shocks observed in 1979, 1986 and 1990.

47

(Christopher Gilbert, March 2010),Main purpose of this study was to quantify the effect of bubble index-based behavior, possibly resulting from extrapolative expectations and

investment on commodity futures prices between 2006 and 2000.The

findings of this study was that both bubble behavior and index investments have had a substantial impact on commodity futures prices.

(Jeffrey Currie, Allison Nathan, David Greely and Damien Courvalin, 30 March 2010) ,The major findings of this study was that commodity price movements can be explained by increasing marginal costs in the long term and fluctuations in inventories in the short term. The authors also find speculative investors contributed to increased price levels and price volatility in recent years noting as speculators buy, prices generally tend to rise, and vice versa. Also the author points out that there is close relationship between price volatility, inventories and storage capacity, as inventories help in closing the gap between physical supply and demand.

(Scott Irwin and Dwight Sanders, 2010),The paper aims to test whether the major growth in index funds has increased price volatility in both agricultural and energy markets and, in particular, whether they helped cause a commodity price bubble in 200608.The findings of this study was that there were no strong evidence that index funds caused a price bubble in commodity futures markets. The authors also find increasing index fund positions are consistently associated with declining price volatility and this paper gives a reasonable explanation for this negative correlation arguing speculation helps to provide sufficient liquidity for hedging needs.

(International Monetary Fund, October 2008),The basic output of this study was that strong demand from emerging economies, low capacity, low inventories resulting in slow supply responses and the interaction between these factors have been the primary causes of the surge in commodity prices observed in the first half of 2008. In addition, demand for biofuel, supply disruptions and trade restrictions have caused food prices to surge even higher. The authors also note that this price momentum may have been reinforced by increased cross-commodity price linkages.

48

(Dwight Sanders, Scott Irwin and Robert Merrin, 1 January 2010), Under this study the author brings out two important findings in agriculture futures market since 1995, firstly a rapid increase in open interest since late 2004 and a stabilization of index funds percentage of open interest since 2006.

(Gary Gorton and K. Geert Rouwenhorst ,March/April 2006),This paper concludes that commodity futures returns have provided effective diversification for stock and bond portfolios. Commodity futures have offered the same return and risk premium as equities over the study period and are negatively correlated with equity and bond returns due to different behavior over the business cycle and positively correlated with inflation, unexpected inflation and changes in expected inflation.

49

CHAPTER 3: RESEARCH METHODOLOGY

50

1. Objectives of research: To study the behavior of the individuals, their perspective, investment preference for commodity market trading in India as compared to other financial markets in India. To study the operation and functioning of commodity market.

2. Research Design: Exploratory design has been selected as data has been collected from the secondary sources inorder to understand the functioning of commodity market and data has been collected from primary source inorder to satisfy the research objectives.

3. Data Collection Method: Most of the data has collected from secondary sources whereas for conduct of research the primary data has been collected through a structured questionnaire wherein a total of 130 respondents took part out of which only 100 have been taken into consideration as the questionnaire pertains to a specific class of respondents, so inorder to reduce the error this has been done. A total of 63 males and 37 females have been include in the research.

4. Sampling: The study mainly deals with the financial behavior of Individual Investors towards Commodity market in India. The required data was collected through a pretested questionnaire administered on a combination of convenience and judgment sample of 100 individual investors. Judgment sample selection is due to the time. Respondents were screened and inclusion was purely on the basis of their knowledge about Financial Markets, Commodity market in particular. This was necessary, because the questionnaire presumed awareness of some basic terminology about Commodity market. The purpose of the survey was to understand the behavioral aspects of individual investors, mainly their fund selection behavior, various factors influencing this behavior and also the conceptual awareness level among individual investors. Sample of the questionnaire is given in Annex. A.

51

5. Instruments used: The primary data was collected through a structured questionnaire by one to one interactions with investors and contact was also made through emails.

6. Analysis and Interpretations: The analysis of the data collected has been performed appropriately and inferences have been drawn. The techniques that are used for analysis of data are Descriptive technique, Crosstabs and Annova which have been performed by the use of SPSS software.

7. Limitations of the study: Sample size is limited to 100 educated individual investors. The sample size may not adequately represent the national market. Simple Random and judgment sampling techniques is due to time constraints. This study has not been conducted over an extended period of time having both ups and downs of stock market conditions which a significant influence on investor s buying pattern and preferences. The research is only exploratory, no conclusion may finally be drawn from it, but only direction may be sought. This is an independent study and the observations may not comply with those which have been made by an experienced professional.

52

CHAPTER 4: Analysis and Interpretation

53

1) Analysis of investors preferences The survey was conducted to capture investor objective for investment in financial instruments, reveals the following. Graph 4.1
High growth Tax benefits Retirement protection Future welfare Reasonable income and safety Stable income High income 0 10 20 17 25 30 40 50 60 70 80 63 10 75 22 66

FREQUENCY

Most of the investors want to invest money for the purpose of future welfare followed by high growth, so company should suggest those instruments which have a positive return for their investment which will help in fulfilling both the objectives. 2) Current investors preference of Individual Investors towards the Following Financial Markets, In the Indian Capital Market Graph 4.2

54

100 80 60 40 20 0

90

84

79

15 3 Equity market Commodity market Currency market Frequency Real estate Mutual funds

From the above analysis we can infer that majority of the people invest in Equity market, while the investment in Commodity market and Mutual funds are almost similar, so therefore investors are inclined more towards the share market.

3) Current Attitude of Individual Investors towards the Following Financial Markets, In the Indian Capital Market Graph 4.3

55

Chart Title
Equity Commodity Currency Real estate Mutual fund

1 13 24 6 79 18 7 0 8 3 21 1

61

78 5 61 66 12 9 1 Somewhat favourable Not very favourable Not at all favourable 1 1 1 Highly favourable 23 Favourable

According to the analysis, we can see that most of the investors are favorable towards Mutual fund under current market scenario followed by Commodity market and somewhat favorable towards Equity market. So, it can be said that investors are looking for safe investment options along with safe return which can be used as a motivation factor for investors to lure them in investing in commodity market. According to the recent reports commodity market are the first to revive for current situation which add as an added incentive for investors to invest in this market as returns are going to be favorable.

56

4) Preference of investors investing in Commodity market Graph 4.4

Frequency
2%

24%

Bullions Agro products 58% Energy Metals

16%

From the above analysis we can clearly identify that Bullions i.e. Gold and Silver are the most favored commodities to be traded in followed by Energy products such as Crude oil, Petroleum.

5)Index preference of investors Graph 4.5

57

Frequency
1%

29% MCX NCDEX NCFM 70%

Mostly investors prefer to deal on NCDEX platform even though MCX platform being the largest platform for Commodity trading in India.

6) Why people resist in investing in Commodity market Graph 4.6

Frequency
0% 23% 38% Difficulty in understanding Increase speculation Very risky Lack of knowledge

39%

According to this analysis we can infer that people who already trade in Commodity market have a perception that perspective investors are not attracted towards Commodity market primarily because of
58

difficulty in understanding as well as lack of knowledge of Commodity market, so the investing companies can resort to various methods to inform these perspective investors and convert them to real investors.

7) Source of information to investors Graph 4.7

Frequency
100% 80% Axis Title 60% 40% 20% 0% Referenc e groups 61 Newspa pers(Gen eral) 1 Newspa pares(Bu siness) 87 Financial magazin es 20 Televisio n 63 Brokers/ Agents 87 Internet

Frequency

From the above analysis we can infer that most of the investors are gathering data from newspapers and from the brokers/agents.

8) Ratings of investors for Commodity market on various attributes. Graph 4.8

59

70 60 50 40 30 20 10 0 Very low Low Neutral High very high

In the above chart we can clearly see that investors perceives that tier id high Liquidity, Flexibility and Good returns in the commodity market whereas most of the investors feel that there is lack of Safety in commodity market. Under the category of diversification it is almost equal so investors think that commodity market plays a role to a certain extent in diversification but not too a great extent. Lastly, investors are not very favorable towards capital appreciation due to investment in commodity market. 9) Crosstabs between Risk taking capacity and Investment horizon of an investor.
What is your preference of investment horizon- Short term * What is your risk taking capacity- High Crosstabulation Table 4.1 What is your risk taking capacity- High yes What is your prefernce of investment horizon- Short term Total yes no 2 4 6 no 21 73 94 Total 23 77 100

What is your prefernce of investment horizon- Short term * What is your risk taking capacity- Low Crosstabulation Table 4.2 What is your risk taking capacity- Low yes What is your prefernce of investment yes 12 no 11 Total 23

60

horizon- Short term Total

no

34 46

43 54

77 100

What is your preference of investment horizon- Short term * What is your risk taking capacity- Medium Cross tabulation Table 4.3 What is your risk taking capacity- Medium yes What is your preference of investment horizon- Short term Total yes no 9 38 47 no 14 39 53 Total 23 77 100

From the above analysis we can find out that that there are very few investors who are willing to invest for short time period so this can be used as great inference that people are willing to put their invest for long or medium duration which is what is required in commodity market.

What is your preference of investment horizon- Long term * What is your risk taking capacity- High Cross tabulation Table 4.4 What is your risk taking capacity- High yes What is your preference of investment horizon- Long term Total yes no 2 4 6 no 42 52 94 Total 44 56 100

What is your preference of investment horizon- Long term * What is your risk taking capacity- Medium Cross tabulation Table 4.5 What is your risk taking capacity- Medium yes What is your preference of investment horizon- Long term Total yes no 24 23 47 no 20 33 53 Total 44 56 100

What is your preference of investment horizon- Long term * What is your risk taking capacity- Low Cross tabulation Table 4.6 What is your risk taking capacity- Low yes no Total

61

What is your preference of investment horizon- Long term Total

yes no

18 28 46

26 28 54

44 56 100

The conclusion that can be drawn from the above three crosstabs is that investors are not in favour of investing their money in commodity market for a long period of time even though some favorable results have been seen in medium category of risk taking capacity of investors in relation to long investment horizon.

What is your preference of investment horizon- Medium term * What is your risk taking capacity- High Cross tabulation Table 4.7 What is your risk taking capacity- High yes What is your preference of investment horizon- Medium term Total yes no 2 4 6 no 28 66 94 Total 30 70 100

What is your preference of investment horizon- Medium term * What is your risk taking capacity- Medium Cross tabulation Table 4.8 What is your risk taking capacity- Medium yes What is your preference of investment horizon- Medium term Total yes no 14 33 47 no 16 37 53 Total 30 70 100

What is your preference of investment horizon- Medium term * What is your risk taking capacity- Low Cross tabulation Table 4.9 What is your risk taking capacity- Low yes What is your preference of investment horizon- Medium term Total yes no 14 32 46 no 16 38 54 Total 30 70 100

From the above analysis we can infer that there are very few investors who are willing to invest in commodity market. So, we can infer from all the above crosstabs that investors want to invest in
62

commodity market for long duration as compared to the other two horizons and investors have an appetite for medium class of risk. 10) Cross tabulation between Annual income and Investment portion of income
Annual income * Investment portion of your income invested Cross tabulation Table 4.10 Investment portion of your income invested below 10% Annual income below 100000 100000-200000 200000-300000 above 300000 Total 16 6 35 18 75 10-15 % 0 0 5 14 19 15-20% 0 0 1 4 5 above 20% 0 0 0 1 1 Total 16 6 41 37 100

In the above analysis we can see that a majority of investors lie between the income group of 200000300000 and likewise investors are investing only a small portion of their income that is below 10% and the third thing we can infer is that around 35 out of 100 lie in this common region. 11) Crosstabs between In which market the investors invest in relation to How they perceive that market.
In which financial market do you invest- Equity market * What is your current market attitude towards the following financial markets- Equity Cross tabulation Table 4.11 What is your current market attitude towards the following financial marketsEquity highly favourable In which financial market yes do you invest- Equity market Total 1 23 66 9 1 100 No 1 0 Favourable 23 0 somewhat favourable 61 5 not very favourable 5 4 not at all favourable 0 1 Total 90 10

We can see that investors who are investing in Equity market are currently somewhat favourable towards this market under current situation which provides an opportunity to shift investors or persuade them into investing in commodity market.
In which financial market do you invest- Commodity market * What is your current market attitude towards the following financial markets- Commodity Crosstabulation Table 4.12

63

What is your current market attitude towards the following financial marketsCommodity highly favourable In which financial market yes do you investCommodity market Total 5 61 21 12 1 100 no 4 1 favourable 60 1 somewhat favourable 17 4 not very favourable 3 9 not at all favourable 0 1 Total 84 16

We can see that investors who are investing in Commodity market are currently favourable towards this market under current situation which provides an opportunity to investors to earn good returns.

In which financial market do you invest- Currency market * What is your current market attitude towards the following financial markets- Currency Cross tabulation Table 4.13 What is your current market attitude towards the following financial markets- Currency somewhat favourable In which financial market do you invest- Currency market Total yes no 1 2 3 favourable 5 13 18 not very favourable 9 69 78 not at all favourable 0 1 1 Total 15 85 100

We can see that investors who are investing in Currency market are currently Not very favourable towards this market under current situation which provides an opportunity to shift investors or persuade them into investing in commodity market and this might be because of fall in rupee and economic slowdown.
In which financial market do you invest- Real estate * What is your current market attitude towards the following financial markets- Real estate Cross tabulation Table 4.14

64

What is your current market attitude towards the following financial markets- Real estate somewhat favourable In which financial market do you invest- Real estate Total yes no 1 7 8 favourable 2 22 24 not very favourable 0 61 61 not at all favourable 0 7 7 Total 3 97 100

As we can see from the above table that there are only a handful of investors who are willing to invest in Real estate market because of which no meaningful conclusions can be drawn.
In which financial market do you invest- Mutual funds * What is your current market attitude towards the following financial markets- Mutual fund Cross tabulation Table 4.15 What is your current market attitude towards the following financial marketsMutual fund highly favourable In which financial market yes do you invest- Mutual funds Total 6 79 13 1 1 100 no 6 0 favourable 70 9 somewhat favourable 3 10 not very favourable 0 1 not at all favourable 0 1 Total 79 21

From the above table we can infer that a large section of investors invest in Mutual fund market and their current attitude towards this market is Favourable, this is because a high rate of return is generated under this market or a fixed return in guaranteed which is not in the case of any other market. 12) Cross tabulation between Occupation and Market investment
In which financial market do you invest- Equity market * Occupation Cross tabulation Table 4.16 Occupation business In which financial market do you invest- Equity market Total yes no 30 1 31 profession 36 4 40 self-employed 21 2 23 others 3 3 6 Total 90 10 100

In which financial market do you invest- Commodity market * Occupation Cross tabulation Table 4.17

65

Occupation business In which financial market do you invest- Commodity market Total yes no 27 4 31 profession 33 7 40 self-employed 21 2 23 others 3 3 6 Total 84 16 100

In which financial market do you invest- Mutual funds * Occupation Cross tabulation Table 4.18 Occupation business In which financial market do you invest- Mutual funds Total yes no 24 7 31 profession 32 8 40 self-employed 19 4 23 others 4 2 6 Total 79 21 100

In the above analysis we can conclude that a large portion of investors are either professional or businessman who are investing in different market and moreover there is high ratio of professionals investing in various markets because of knowledge they posses and awareness about these markets. 13) Cross tabulation between Age groups and Investment objective

What is your investment objective- High income * Age Crosstabulation Table 4.19 Age 25-30 What is your investment objectiveHigh income Total yes no 9 19 28 30-35 6 27 33 35-40 7 15 22 40above 3 14 17 Total 25 75 100

What is your investment objective- Stable income * Age Crosstabulation Table 4.20 Age 25-30 What is your investment objectiveStable income yes no 4 24 30-35 3 30 35-40 5 17 40above 5 12 Total 17 83

66

What is your investment objective- Stable income * Age Crosstabulation Table 4.20 Age 25-30 What is your investment objectiveStable income Total yes no 4 24 28 30-35 3 30 33 35-40 5 17 22 40above 5 12 17 Total 17 83 100

What is your investment objective- Reasonable income and safety * Age Crosstabulation Table 4.21 Age 25-30 What is your investment objectiveReasonable income and safety Total yes no 17 11 28 30-35 26 7 33 35-40 11 11 22 40above 9 8 17 Total 63 37 100

What is your investment objective- Future welfare * Age Crosstabulation Table 4.22 Age 25-30 What is your investment objectiveFuture welfare Total yes no 18 10 28 30-35 23 10 33 35-40 19 3 22 40above 15 2 17 Total 75 25 100

What is your investment objective- Retirement protection * Age Cross tabulation Table 4.23 Age 25-30 What is your investment objectiveRetirement protection Total yes No 0 28 28 30-35 1 32 33 35-40 1 21 22 40above 8 9 17 Total 10 90 100

What is your investment objective- Tax benefit * Age Crosstabulation Table 4.24

67

Age 25-30 What is your investment objectiveTax benefit Total yes no 2 26 28 30-35 1 32 33 35-40 5 17 22 40above 14 3 17 Total 22 78 100

What is your investment objective-High growth * Age Crosstabulation Table 4.25 Age 25-30 What is your investment objectiveHigh growth Total yes no 18 10 28 30-35 28 5 33 35-40 15 7 22 40above 5 12 17 Total 66 34 100

From the above tables we can infer that investors lying in the age group 30-35 are driven by high growth and reasonable income and safety as an objective, on the other hand we can see, as the age group increases investors are driven by the objective of future welfare and retirement protection. 14) Annova between Investment portion and Occupation FORMATION OF HYPOTHESIS H0:There is no significant difference between Investment portion and occupation of investors. H1:There exists significance difference between Investment portion and occupation of investors. Level of significance = 5%
ANOVA Table 4.26 Sum of Squares Between Groups Within Groups Total 4.737 33.023 37.760 Df 3 96 99 Mean Square 1.579 .344 F 4.590 Sig. .005

As the F value or the test value is 4.590 which is significantly higher than 0.05 so we can not reject the null hypothesis in favor of alternate hypothesis which means there is no significant difference between investment portion and occupation of investors.

15) Annova between Investment objective of investors and Investment in commodity market. FORMATION OF HYPOTHESIS
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H0:There is no significant difference between Investment objective of investors and Investment in commodity market. H1:There exists significance difference between Investment objective of investors and Investment in commodity market Level of significance = 5%

ANOVA Table 4.27 Sum of Squares What is your investment objective- High income Between Groups Within Groups Total What is your investment objective- Stable income Between Groups Within Groups Total What is your investment objective- Reasonable income and safety What is your investment objective- Future welfare Between Groups Within Groups Total Between Groups Within Groups Total What is your investment objective- Retirement protection What is your investment objective- Tax benefit Between Groups Within Groups Total Between Groups Within Groups Total What is your investment objective-High growth Between Groups Within Groups Total .044 18.706 18.750 .170 13.940 14.110 .562 22.748 23.310 .399 18.351 18.750 .064 8.936 9.000 .309 16.851 17.160 1.553 20.887 22.440 df 1 98 99 1 98 99 1 98 99 1 98 99 1 98 99 1 98 99 1 98 99 1.553 .213 7.289 .008 .309 .172 1.797 .183 .064 .091 .700 .405 .399 .187 2.130 .148 .562 .232 2.420 .123 .170 .142 1.197 .277 Mean Square .044 .191 F .232 Sig. .631

69

16) Annova between Awareness of commodity market and various sources.

FORMATION OF HYPOTHESIS H0:There is no significant difference between Awareness of commodity market and various sources. H1:There exists significance difference between Awareness of commodity market and various sources. Level of significance = 5%

ANOVA Table 4.28 Sum of Squares How do you come to know about the commodity market- Reference groups How do you come to know about the commodity marketNewspapers(general) How do you come to know about the commodity marketNewspapers(Business) How do you come to know about the commodity market- Financial magazines How do you come to know about the commodity market- Television Between Groups Within Groups Total .401 22.909 23.310 1 98 99 .401 .234 1.715 .193 Between Groups Within Groups Total .040 15.960 16.000 1 98 99 .040 .163 .248 .620 Between Groups Within Groups Total .765 10.545 11.310 1 98 99 .765 .108 7.105 .009 Between Groups Within Groups Total Between Groups Within Groups Total .376 23.414 23.790 .000 .990 .990 df 1 98 99 1 98 99 .000 .010 .010 .921 Mean Square .376 .239 F 1.573 Sig. .213

70

How do you come to know about the commodity market- Brokers/agents How do you come to know about the commodity market- Internet

Between Groups Within Groups Total Between Groups Within Groups Total

.765 10.545 11.310 .003 4.747 4.750

1 98 99 1 98 99

.765 .108

7.105

.009

.003 .048

.052

.820

17) Independent T test between Investment purpose and Gender

FORMATION OF HYPOTHESIS H0:There is no significant difference between investment purpose and gender. H1:There exists significance difference between investment purpose and gender. Level of significance = 5%

Independent Samples Test Table 4.29 Levine's Test for Equality of Variances t-test for Equality of Means 95% Confidence Interval of the Sig. (2F What is your investment objective- High income What is your investment Equal variances assumed Equal variances not assumed Equal variances assumed 2.112 22.081 Sig. .000 t 2.055 - 92.790 2.221 .149 -.706 98 .482 -.055 .078 -.211 .100 .029 -.182 .082 -.345 -.019 df 98 tailed) .043 Mean Std. Error Difference Lower -.358 Upper -.006

Difference Difference -.182 .089

71

objectiveStable income What is your investment objectiveReasonable income and safety What is your investment objectiveFuture welfare What is your investment objectiveRetirement protection What is your investment objective- Tax benefit What is your investment objective-High growth

Equal variances not assumed Equal variances assumed Equal variances not assumed 37.812

-.731 83.746

.467

-.055

.076

-.206

.095

.000 2.966

98

.004

.287

.097

.095

.479

3.153 89.662

.002

.287

.091

.106

.468

Equal variances assumed Equal variances not assumed Equal variances assumed Equal variances not assumed

5.154

.025 1.072

98

.287

.097

.090

-.082

.275

1.111 83.998

.270

.097

.087

-.076

.269

6.045

.016

1.170

98

.245

-.073

.062

-.197

.051

- 95.663 1.288

.201

-.073

.057

-.185

.040

Equal variances assumed Equal variances not assumed Equal variances assumed Equal variances not assumed

42.069

.000

2.633

98

.010

-.221

.084

-.387

-.054

- 97.947 2.982 2.051 .155 .686 98

.004

-.221

.074

-.367

-.074

.495

.068

.099

-.128

.264

.694 78.427

.490

.068

.098

-.127

.262

72

CHAPTER 5: CONCLUSION and RECOMMENDATIONS

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This decade is termed as "Decade for Commodities". Since the economic slowdown all over the world, the first scenes of recovery have been witnessed in commodity market. It was in 2010 that when the prices of commodity markets were on a rise after recession which triggered a revival of many economies such as USA, UK , India , China etc. Now the trend for commodity market is shifting to developing countries like India due to high agricultural dependence and production. Moreover, in coming years China will take over USA in commodity trading all over the world and India will jump to 3rd place this will be because of high and growing population which will lead to increase in demand for agriculture products and if we see the trend the overall yield per hectare is also increasing for the last decade. India is one of the top producers of large number of commodities and also has a long history of trading in commodities and related derivatives. The Commodities Derivatives market has seen ups and downs, but seems to have finally arrived now. The market has made enormous progress in terms of Technology, transparency and trading activity. As majority of Indian investors are not aware of organized commodity market; their perception about it is of risky to very risky investment. Many of them have wrong impression about commodity market in their minds. It makes them specious towards commodity market. So, there is a large or vast amount of untapped market in India in both urban as well as rural sectors and regulatory bodies have to play a major role in tapping these markets and luring investors to invest in commodity market. It is also believed that Indians have a high risk appetite. So, There is no doubt that in near future commodity market will become hot spot for Indian farmers rather than spot market. And producers, traders as well as consumers will be benefited from it. But for this to happen one has to take initiative to standardize and popularize the Commodity Market. So, one can conclude on the basis of the analysis that have been carried out that investors in current scenario i.e. with the burden of fall in rupee, increase inflation and high volatility have changed their objectives to Reasonable income along with safety for the purpose of future welfare as future looks uncertain. Now a day's investors are willing to bear very minimum risk and that too for short span of period and most of the investors are inclined to invest their money in mutual funds and commodity market. The attitude of investors towards mutual fund investment is much more favourable than any other market as there is offer of around 12-14% guaranteed return which if brought about in commodity market can lead to tapping of huge untapped market. Investors are willing to invest only in bullions(gold, silver) as their prices tend to rise over a time horizon and due to lack of knowledge other areas of commodity market as not favored upon as compared to international market where large amount of money is invested in agriculture based products. Inorder to
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increase investment in commodity market the regulators have to take initiative to educate and inform mass people about the working of commodity market and ensure strict rules and regulations for investors safety which is a major concern these days. At last the major findings of this study are that investors are reluctant to invest in commodity market due to lack of knowledge ad difficulty in understanding the functioning of commodity market and the major area of concern for investors is the safety driven by the objective of reasonable income for future welfare. Recommendations:i) The Commodity market operational environment is becoming more competitive. Hence, the impact of emerging competition on investor behavior/behavioral changes needs to be studied further. ii) Developments in technology influence the behavior of investors. Hence, the impact of technology on financial behavior is another potential area for close study. Since the industry is still struggling to win the investors confidence, in-depth analysis into investors expectations from Commodity market, its performance, management, service and other related areas could be done. iv) This study reveals that Commodity market investors feel that currently the two major benefits, which Commodity market claim to offer, namely, Diversification and Safety are not satisfactorily delivered. In spite of this, Commodity market industry is growing and we attribute this to investor behavior and other macroeconomic factors. Further research can be done to understand the reasons for growing popularity on one side and the struggle to win investors confidence on the other side. v) vi) As we have seen from this study that Commodity market is on a rise in terms of value, so a study can be conducted further to understand the untapped market. This study was conducted during less volatile period of market, a further research can be conducted on commodity market taking into consideration a long period where volatility can also be taken into consideration and more meaningful conclusions can be drawn.

iii)

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REFERENCES Websites:
articles.economictimes.indiatimes.com/keyword/commodity_market (Economic times, 2013) blog.euromonitor.com/2012/04/monthly-review-of-commodity-markets-april-2012-update.html businesstoday.intoday.in/story/top-commodities businesstoday.intodayin/story/indias-commodity-market-to-register-gains/1/15682.html commodities.about.com/old/managingourportfolio/a/commodities-Review-For-2012.htm en.wikipedia.org/wiki/commodity_market moneyweek.com/eight_reasons_commodities_beat_study_every_time www.bseindia.com/education/content/module_ncfm.htm www.cmegroup.com www.commodityonline.com/Futures-trading/market-report/India-commodity.futures.trade.valueat-Rs.157.828-lakhs-cr-inAprilFeb.2012-13:Fmc-29536.html www.fmc.gov.in/shocs_file.aspx?linked=FMC%20Bulletin%20April%202013_32893130.pdf www.forbes.com www.futureindustry.org www.globalresearch.co/india-commodity-transaction www.icexindia.com www.imf.org/external/np/res/commod/Commodity_Market_review1012.pdf www.indiainfoline.com/Markets/News/MarketNews/Commodity www.mcxindia.com www.moneyschool.indianmoney.com/money-gyan-modules www.ncdex.com www.nmce.com
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 www.rjas.info/wp-content/uploads/2013/04/Commodity-Futures-Market-in-India-ImposeGrowth-Roles-and-obstacles.pdf www.tradingpick.com/begineers_guide.htm

Articles:
Commodity prices and Price volatility: old answers to new questions Facts and fantasies about commodity futures Index Investment and Financialization of commodities Placing the 2006/08 commodity price boom into perspective Price formation in Financialised commodity market: the role of information Speculative influences on commodity futures prices 2006-08 The adequacy of speculation in agricultural futures market: Too much of a good times? The impact of Index and swap funds on commodity futures markets The role of inventories and speculative trading in the global market for crude oil World economic outlook: Financial stress, Downturns and Recoveries

ANNEXURE Annexure 1: Copy of questionnaire

Survey on Investors attitude towards Commodity Market.

This questionnaire is a part of my summer internship at India Infoline Pvt ltd (IIFL). Your response would be very useful for my research. All the responses will be kept confidential. Thanks for your cooperation. :)

(The IIFL (India Infoline) group, comprising the holding company, India Infoline Ltd and its subsidiaries, is one of Indias premier providers of financial services. IIFL offers advice and execution platform for the entire range of financial services covering products ranging from Equities and derivatives, Commodities, Wealth management, Asset management, Insurance, Fixed deposits, Loans, Investment Banking, Gold bonds and other small savings instruments.)

PERSONAL INFORMATION
1. Name

77

2. Gender Mark only one oval. Male Female 3. Age Mark only one oval. 25-30 30-35 35-40 40 above 4. Occupation Mark only one oval. Business Profession Self-employed Others

78

5. Annual income Mark only one oval.

Below 100000

100000-200000 200000-300000 Above 300000

6. Investment portion of your income Mark only one oval.

Below 10% 10-15% 1520% Above 20%

7. Do you invest money in financial market? Mark only one oval. Yes NO 8. In which financial market do you invest? (You can tick more than one) Check all that apply. Equity market Commodity market Currency market Real estate Mutual funds Others

79

9. What is your current market attitude towards the following financial markets? Mark only one oval per row. Highly favourable Equity Commodity Currency Real estate Mutual fund Somewhat favorable Not very favourable Not at all favourable

Favourable

10. What is your preference of investment horizon? (You can tick more than one) Check all that apply. Short term Long term Medium 11. What is your risk taking capacity? (You can tick more than one) Check all that apply. High Medium Low 12. What is your investment objective? (You can tick more than one) Check all that apply. High income Stable income Reasonable income and safety For future welfare Retirement protection Tax benefit

80

High growth

81

13. Are you aware of commodity market? Mark only one oval. Yes No 14. How do you come to know about the commodity market? (You can tick more than one) Check all that apply. Reference groups Newspapers(general) Newspapers(business) Financial magazines Television Brokers/Agents Internet Others 15. Do you invest in commodity market? Mark only one oval. Yes No 16. How long have you been trading in commodity market? Mark only one oval.
Below 1 year 1-2 years 2-3 years

Above 3 years 17. What is the frequency of your trading? Mark only one oval. Daily Weekly

82

Monthly Every season Occasionally Rarely

83

18. In which commodity do you invest? (You can tick more than one) Check all that apply. Bullion(Gold, Silver) Agro products(sugar,rmseed,etc) Energy( crudeoil,petroleum,gas,etc) Metals(steel,copper) 19. What type of investment do you prefer? (You can tick more than one) Mark only one oval. Future contarcts Forward contracts Options Basic payoffs 20. How do you rate commodity market on the basis of following attributes? Mark only one oval per row. 1 Very low 2 Low 3 Neutral 4 High 5 Very high Safety Liquidity Flexibility Good return Capital appreciation Diversification 21. Which commodity exchange do you prefer for investment? (You can tick more than one) Check all that apply. MCX NCDEX NMCF

84

Others

85

22. Why people do not invest in commodity market? (You can tick more than one) Check all that apply. Lack of knowledge Difficulty in understanding Increase speculation Very risky 23. Would you recommend others to enter into commodity market? Mark only one oval. Definitely Probably Not sure Probably not Never

86

87