Commodities trading witnesses a new era

Sharad Mistry

SamvaT 2054 could be considered the year of commodities. There were more developments on this front during the year than in the past thirty years.These developments, alongwith major policy changes, have collectively ushered in an era of commodities trading.

The government, on its part, initiated a series of policy measures to modernise the commodity futures markets in the country. However, it may be too early to say whether these steps are suitable enough for the private sector to kick off commodity futures trading in the real sense of the word.

Recent developments in commodities trading has put tremendous responsibilities on the Forward Markets Commission (FMC), the apex regulatory body for commodity exchanges and the ministry of food and consumer affairs.

After three decades of restrictions, these developments once again brings to the fore not just the importance of FMC but the question of additional powers to the Commission.

One aspect that could hamper serious trading, is the lack of players.Corporates, banks, traders, importers etc are not yet geared up to take on the challenges thrown in by the latest developments. With near-total absence of knowledge pool, there appears to be some reluctance to take advantage of the current sluggish prices in the global commexes.

The following list gives a glimpse of some of the recent steps taken on futures trading:

Futures trading in gold may be introduced in the near future, if the pace in policy changes is any indication. The latest being the State Bank of India intending to becoming the first Indian bank to launch gold deposits over the next few months. Last year, the RBI had put import of gold under OGL, with a duty of 35 per cent.

On September 28, 1998 the Reserve Bank of India announced the first set of guidelines for `Hedging of Commodity Exposure on International Commodity Exchanges', thereby throwing the doors open for the corporates to hedge their risks on global commexes. p On November 21, 1997, the nine-member committee headed byRV Gupta (then deputy governor, RBI) submitted its report on Hedging of Commodity Exposure on International Commodity Exchanges.

On October 8, 1998 the Forward Markets Commission (FMC) gave its nod to East India Cotton Association (EICA), Mumbai, to reintroduce cotton futures on Cotton Exchange (Sewree, Central Mumbai) with immediate effect. Cotton futures were banned in August 1966. The country's first organised exchange--Cotton Exchange of Bombay--was established in 1921.

On September 17, the government launched the first leg of the World Bank aided 18-month project to strengthen the domestic commexes. The World Bank has committed to extend a $ 0.5-million grant to the government for this purpose. Also, it has in-principle accepted the recommendations of Kamal Kabra Committee on strengthening the domestic comexes. This could see the introduction of options in the near future.

In September 1998 futures trading in soyabean were permitted so as to restore price sanity in the soya complex-- beans, oils and extractions.p In May 1998, the country's first coffee futures exchange, Coffee Futures Exchange of India (COFEI), was kicked off in Bangalore, jointly with the Coffee Board. Two months ago, futures trading had commenced in hessian at the Calcutta's Jute and Hessian Exchange.

In November 1997, the country's first international commodity futures exchange--International Commodity Exchange (ICE) wing of the Indian Pepper and Spice Traders' Association (IPSTA) was established.

It has failed to take off forcing the government to consider experimenting dollar-based derivatives on the bourse.

The Bombay Oilseeds and Oils Exchange (BOOE) was permitted to trade in international futures in castor last year. BOOE office bearers are finalising the modalities for the same.

It was in May 1998, that the government gave an `in-principle' nod for oilseed imports under the open general licence. However, there has been no clear-cut notification to this effect till date. No import ofoilseeds have been materialised so far.

Pressed by the sugar lobby here, the government hiked the import duty on sugar to 25 per cent from 15 per cent earlier. This has hardly saved the industry from flood of imported sugar, majority from right across the border.

In absence of hedging and futures trading in edible oilseeds and their oils, groundnut oil touched its peak last week at Rs 655 per 10 kg. Thanks to the mustard oil ban by the government following the cases of dropsy deaths that rocked Delhi last month.

The 1998-99's budget proposals announced in June this year, gave fresh thrust and responsibilities to the National Bank of Rural Development (Nabard) to fund the agri-sector, including the introduction of credit card for the rural sector aimed at increasing credit flow to the rural sector.

The way ahead

Despite these and other related developments in the domestic commodity futures trading, there are problems that could delay the onset of commodity futures, both withinand outside the country.

A few corporate heads feel it is too early to say when will hedging activities commence on the international commexes.

"We are still studying the RBI policy," said an executive of a leading Aditya Birla group company engaged in manufacturing of non-ferrous metals.Further, at the recent two-day seminar on development of domestic commodity futures market held in New Delhi, jointly with the World Bank, important issues were discussed and therefore, need urgent considerations from the concerned authorities. These are as follows:

Expanding and broad-basing membership of existing commodity exchanges;

Capital adequacy norms for members (to help them trade in international futures on say IPSTA, ICE and BOOE;

Policies aimed at increasing volumes of trading and liquidity of commodity futures contracts;

Comprehensive improvements in the infrastructure, financial strength of domestic comexes;

Daily clearing of futures contracts;

Common trading bye-lawsfor and research divisions in domestic comexes

Legal interpretation and taxation of gains and losses from futures trading

Lastly, there is an urgent need, say market sources, on part of the government and the FMC to initiate the awareness programme for commodity futures, more so in the light of the recent policy changes and the developments in the international commodity markets.

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