Commodity trading in India down sharply in the wake of scam, gold curbs

Negative investor sentiment due to recent payment crisis in the National Spot Exchange Ltd (NSEL), sluggish participation in gold and silver futures and increased volatility following rupee have combined to pull down the turnover in India’s top commodity futures trading exchanges, according to an expert paper prepared by ASSOCHAM.

From a peak of Rs 181.26 lakh crore in 2011-12, the turnover in the commodity futures dropped to Rs 170.47 lakh crore in 2012-13 and witnessed a sharp decline to Rs 85.28 lakh crore in 2013-14 (April-Jan 15), the report said.

“Despite many constraints and limited participation, this market saw a whopping rise in turnover within few years. However, in the recent time the scenario of the commodities trading has changed on a wider way. India’s five top commodity futures trading exchanges have lost their pace of increasing turnover since 2012-13”, it said.

Levy of CTT (Commodity Transaction Tax) over futures market leading to increased cost of transactions, lower volatility and higher bid-offer spread (impact cost) hitting intraday traders, investors turning to the futures and options (F&O) segment of equities, negative sentiment due to NSEL payment crisis and rupee depreciation were among the principal reasons listed for a drop in the turnover in the commodities futures.

The Assocham paper noted that a sluggish participation in gold and silver futures also led to the problems in this market which can help the country minimise price risks emerging from the international commodities prices as India now imports bulk of raw materials , especially in base metals and energy.

Referring to the policy issues, the paper which had contributions from the industry experts, said the commodity markets regulator, Forward Markets Commission (FMC) lacks financial and administrative autonomy to meet the growing challenges in the commodity derivatives market.

The authority of FMC is undermined because of its absence of powers to issue directives to the intermediaries and other persons related to commodity derivatives market. It does not have powers to investigate the affairs of the intermediaries or any person associated with the commodity derivatives market and has no power conferred on the FMC by the Act to make regulations.
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The FMC does not have provisions for compulsory corporatization and demutualization of commodity exchanges. Realising the importance of empowering FMC and allowing trade in derivative products that are needed for the growth of the Indian economy, legislative action to amend the Act was proposed as early as 1998.

However, despite the amendment bill being introduced thrice in successive LokSabhas, recommended by Parliamentary Standing Committees twice, passed as an ordinance once, and even though there is a broad political consensus on its passage, it has not yet been passed by the parliament. FCRA Amendment Bill 2010 (Bill) needs to be passed urgently, as it will not only strengthen FMC by rendering it the necessary autonomy, but also pave the way to introduce new tools for hedging.