History of Commodity Trading in India:
Commodity trading in India is not a new affair, instead, it can be traced back to the pre-independence era. The constitution of the Bombay Cotton Trade laid the first milestone of commodity trading in India in the year 1875. With the effect of the liberation policy in 1991, the Indian commodity trading market got huge momentum. After the discontinuation of futures due to war and food shortages, it was reintroduced in 1994. This reintroduction of futures apparently led to the inclusion of agricultural commodities.
Commodity Trading Exchanges in India:
In India, commodities can be traded in the following six exchanges.
- MCX or Multi Commodity Exchange, has the biggest share of the market at 70%
- NCDEX or National Commodity and Derivatives Exchange, has a market share of 25%
- NMCE or National Multi Commodity Exchange, having a market share of 5%
- ICEX or Indian Commodity Exchange
- ACE or Ace Derivatives Exchange
- UCX or the Universal Commodity Exchange.
What are the Commodities that are Traded in India?
The commodity trading market in India is quite diverse. The tradable commodities include the following:
- Metals include aluminum, copper, lead, tin, zinc, steel, sponge iron, etc.
- Bullion consisting of gold and silver
- Fiber that includes various grades of cotton and kappas
- Petrochemicals that include HDPE, polypropylene, PVC, etc.
- Energy including crude oil and natural gas
- Spices that consist of cardamom, red chili, turmeric, etc.
- Pulses like chickpeas, lentils, yellow peas, etc.
- Plantations that include various types of nuts, coffee, rubber, etc.
- Cereals like maize
- Various types of oil and oilseeds range from castor, coconut, rice bran, sunflower, refined, soy, sesame, etc.
What are the risks associated with Commodity Trading in India?
Like all other forms of investment, commodity trading in India is also not free from various forms of risks. Though the exchanges have been established to minimize the risks, they can never cancel out the risks entirely. Therefore, a structured risk management system needs to be in place to take all these risks into account and still take the utmost precautionary measures so that there is profit in the trading. With the number of parties exposed to the market risks varying from producers, manufacturers, importers, and exporters, the extent and nature of risks also vary and so do the measures taken by each to minimize these risks.
Price Risk:
Variation of prices for various commodities is common as it changes depending on the demand and supply in the market. Historical data and trend-watching can help you form an idea but will never make you predict the price risk correctly over a prolonged duration.
Basis Risk:
When hedging occurs to minimize the impact of price fluctuations, it results in a basis risk. It signifies the difference between the spot and the futures price and the changes in time from when a hedge is placed or lifted.
Quantity Risk:
One form of quantitative risk is realized by the producers and the manufacturers when they expect high demand and therefore end up producing a greater amount of products, but with the number of available products increasing, the prices fall. When the demand declines, they are again left with excess products which they have to sell at much lower prices.
Another form of quantitative risk occurs when there is hedging to minimize the price fluctuations with the use of futures, and it creates a shift in the balance between the futures size and the commodities required to be hedged.
Geopolitical Risk:
Since certain commodities are indigenous to a specific geographical location, trading in those commodities involves negotiations with the concerned government on the basis of tax structures, license agreements, demands of indigenous employers, environmental concerns, and the like. This stuff compounds to form the geopolitical risk.
Speculative Risk:
Investing in a commodity market, you are always exposed to a constant speculative risk because you are uncertain about the profit or loss of your investment. A speculative risk depends upon all the above risks taken into consideration.
Benefits of Commodity Trading in India:
The above risks should not discourage you from commodity trading in India as it has its own inherent benefits.
- Commodity trading in India creates chances of high returns and you might encounter colossal profit through commodity trading.
- Commodity trading is a safe bet during times of financial crisis, hyperinflation, etc.
- Commodity trading will allow for the successful diversification of your investment portfolio.
- Commodity trading has advanced through leaps and bounds and the online commodity trading market is highly transparent, therefore offering you a fair share of credibility.
But it is always advised to be safe than sorry, and hence you should do your necessary research before considering a venture in the commodity trading landscape.
