India is a primarily commodity-based economy due to its relatively very high consumption’s capacity both in terms of hard and soft commodities. According to an estimate two-thirds of a billion people in India are engaged in agri-based activities both directly and indirectly related to the agricultural sector. Unlike the physical trading market, the commodity market in futures is largely used as a part of a risk management mechanism on either physical commodity itself or open positions of commodity stocks. It was one of the most lively and vibrant markets until early 1970. It was slowed down a little during further decades due to a number of restrictions and controls which hampered the development and growth of the same. But since most of these restrictions have been removed due to the globalization of the Indian economy, there is a tremendous potential of growth of commodity market in India. Commodities, in fact, have become a separate asset class for market-oriented investors and speculators.
Lately, retail investors have also been able to realize the depth and potential of commodity trading. With these understandings, they are now more knowledgeable about the basic fundamentals of demand and supply of this market. Another encouraging factor in popularizing the commodity market among the retail segment is that commodities future are less volatile as compared to that with stocks and bonds. This facilitates the wider options for diversification of the portfolio.
In fact, the size of the commodity market in India is also quite significant. Of the total GDP of about Rs. 13, 30,000 crores, commodity-related industries constitute 58% of this figure. Further, currently, various commodities across the Indian economy register about Rs. 1, 40,000 Crores mark.
Indian commodity market has a wide range of products vise. Precious metals, base metals, crude oil, energy and soft commodities like plan oil, coffee, etc. which are traded on various domestic and international platform and market places. The Indian commodity exchanges have made a big leap since their existence with multiplying volume every year. According to an analysis made by forwarding market commission (FMC), the Indian commodity trading level has increased 120 times since electronic trading was introduced in 2003.
The MCX (Multi commodity exchange) is the world’s largest exchange in silver, the second largest in Gold, copper and natural gas and third largest in crude oil futures. However, the exchange-traded commodities account for only a fifth of the total volume of commodities traded in India. At the global level, the future market in commodities is about 30-40 times the size of physical commodities trade. More of this difference indicates the more thinly spread of risk across the market. So evidently there is tremendous scope for increase in the volumes of commodity trading in India.
The rising trade volumes of commodities traders are mainly due to the fact that it provides an efficient platform for hedging against price and other economic uncertainties or global volatility. The commodity exchange provides a transparent discovery of price. On these exchanges, the active participation of stakeholders of the commodity value chain facilitates fair value price. This could happen only because of the easy accessibility of information on demand and supply condition of the market.