COMMODITY TRADING IN INDIA
What is commodity and commodity trading?
Any materials that can be buy or sold in a market is called commodity. In commodity trading we can sell or buy commodities that we use in everyday life. There are different types of commodities that are buy and sold by commodity trading. They are-
- Metals including Silver, Gold, Platinum, and Copper
- Energy including Crude oil, Natural gas, Gasoline etc.
- Agricultural products including grains, pulses, spices, cotton, sugar, coffee etc.
- Livestock and Meat products including Eggs, Pork, live cattle, and feeder cattle. etc.
History of commodity trade in India
The formation of the Bombay Cotton Trade Association in the year 1875 was the first milestone in the history of commodity trading in India. India has a dynamic futures market in commodities till 1960s. After which the commodity trade got disconnected due to political and socio economic reasons. Introduction of liberalization policy in 1991 by Narasimha Rao Government paved the way to reintroduction of commodity trade in India. A committee was formed with the chairmanship of Prof. K. N. Kabra in 1993. The committee submitted suggested the re-introduction of futures and advice to expand its coverage to agricultural commodities. The Government of India allowed the re-introduction of commodity futures in India in 2002.
Major commodity trading exchanges in India
As of now there are six major commodity trading exchanges in India. They are listed below.
- Multi Commodity Exchange – MCX
- National Commodity and Derivatives Exchange – NCDEX
- National Multi Commodity Exchange – NMCE
- Indian Commodity Exchange – ICEX
- Ace Derivatives Exchange – ACE
- The Universal Commodity Exchange – UCX
Who regulates the commodity market in India?
The Forward Markets Commission (FMC) was the chief regulator of commodity futures markets in India. It was established in 1953 under the provisions of the Forward Contracts (Regulation) Act, 1952. FMC was merged with the Securities and Exchange Board of India (SEBI). SEBI regulates Commodity Markets Since September 2015.
What is a Future Contract?
A future contract is an agreement between the traders to buy or sell a commodity in the future. The trade is done at a certain time in the future at a pre-determined price with a specified quantity. The commodity exchange should be done at the predetermined price and current market place has nothing to do with it. Future contract is considered to be the best way of commodity trading in India.
Benefits of investing in commodity market
- Price Discovery- Commodity exchange offers a fair and continuous market for the price discovery. Sellers and buyers are free from middlemen.
- Credit accessibility – Loans can be issued very easily. Banks and financiers have no issues to allow a loan against the commodities as the commodity exchanges ensure the continuity of trade.
- Price Risk Management– Hedging is one of the most common methods of price risk management. Hedging offered in community exchange helps to reduce the effects of fluctuations in price.
- Portfolio diversification – Commodity can be invested at another investment options as they are an independent asset class. So one can diversify one’s portfolio.
