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MUMBAI
June 7th, 2006
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INTRODUCTION TO COMMODITIES:
The investment universe has, for long, consisted of stocks, bonds, fixed deposits,
mutual funds, jewellery, real estate and art. Sophisticated investors deal in currencies or
timber also. The lifting of the 30-year ban on commodity futures trading in India has
opened yet another avenue for investors. Many analysts feel that we cannot ignore a
whole asset class, that is, commodities. An analysis of worldwide flow of capital, new
materials, goods and information helps one in understanding financial markets in a
better manner. Internationally, commodity market is many times bigger than stock
market. Commodities market is the largest non-financial market in the world. The
twentieth century has seen three periods of commodity bull markets; the periods are
1906-23, 1933-53 and 1968-82. The present bull market had started in 1999.
Commodity pundits are of the opinion the present bull market will last for another 10 to
15 years.
In the 1960s commodity futures were banned in our country. In 1998, the
Government started liberalizing futures trading in commodities. In April 2003, the
Government permitted futures trading in all the commodities. In a follow-up move it said
it would allow new commodity exchanges to come up and let them deal in all
commodities, on an electronic trading platform. The major commodity exchanges in India
are National Commodity and Derivatives Exchange Ltd (NCDEX), Multi Commodity
Exchange of India Ltd (MCX), National Multi Commodity Exchange of India Ltd and
National Board of Trade (NBOT). Forward Markets Commission (FMC) is the regulatory
body for the commodities trading. FMC is an arm of the Ministry of Consumer Affairs,
Food & Public Distribution. FMC is thinking of introducing commodity options also.
State Bank of India has sought the approval of the Reserve Bank of India to get
into exchange traded commodity futures. SBI feels a commodity future trading is a good
investment opportunity. In August 2004, SBI had taken a 10% stake in the equity capital
of MCX. Our Bank also holds a small stake in the exchange.
AGRI COMMODITIES: Farmers are also expected to profit from the futures market in
agri commodities. If farmers expect a good crop in a particular season, they can sell part
of their expected crop forward on exchanges. This will enable the farmers to lock into a
price irrespective of the price on the day the crop is harvested. Some of the exchanges
have networked major ‘mandis’ and provide prices of agri commodities on a real time
basis. Some exchanges are working with banks to fund farmers against commodities
stored in accredited warehouses. Government is also mulling introduction of a
Warehouse Receipts Act to provide legal validity to such warehouse receipts.
The major traded commodities in India are: gold, silver, oil, guar, soya bean, cotton,
mustard seed, RBD palmolein, soya oil, castor seed, wheat, rice, sugar, coffee, tea,
pepper and rubber.