The Indian commodity derivatives market has undergone a profound metamorphosis during the last few years. According to the SEBI Annual Report 2021, the total turnover of the commodity derivatives market was close to Rs 92 lakh crore, thanks to the series of measures that the SEBI introduced to expand the market and foster more depth and liquidity.
Key development in the Commodities derivatives market in recent years
One of the reasons for increased trade volumes on the commodity derivatives exchanges in India is its strength as an efficient hedging platform against price uncertainty and global volatility. This is achieved through price discovery, wherein several stakeholders with access to demand-supply information actively participate across the commodity value chain.
The icing on the cake was an announcement in 2018-19 that allowed the participation of institutional participants in the commodities derivatives market. Eligible foreign entities (EFEs), Mutual Funds, Portfolio Management Services, and Asset Management Companies (AMCs) are some of the institutional investors that participate in the commodity futures market. This widened the commodity derivative market’s participant base compared to the previous years.
The launch of delivery-based futures contracts of base metals on MCX, starting January 2019 was a significant step in developing the domestic price benchmarks in metals. This is likely to result in transparency in the price discovery process setting domestic benchmarks. At the same time, it also facilitates internationally accepted quality standards among stakeholders.
The Changes expected the Commodities Market
Commodity derivatives help major organizations manage price risks and enhance the market competitiveness of an economy. India is globally one of the leading producers and consumers of several commodities. Awareness and policy initiatives by SEBI can boost the position of the Indian commodity derivatives market to the top on the global map.
However, the commodities market in India still has a long way to go. Commodity trading has been limited mainly to trading houses and high net worth individuals (HNIs) despite substantial benefits. Because of a lack of awareness and familiarity, retail investors have stayed away from the commodities derivatives market.
At this juncture, an investment in education and research is the need of the hour for sustainable growth in the commodities market. The MCX has been actively working towards creating awareness about the modern trading mechanisms, innovation, and research. It has organized several outreach programs for educating the primary beneficiaries about hedging and price discovery.
The market demand for banks’ participation in the commodities futures market is growing stronger. Banks must offer commodity-based loans and hedge such exposure to attract smaller players in the market.
More and more institutional participants should be able to freely invest in the commodities futures market of their knowledge base and risk management abilities. The commodities market must also open up to foreign entities, including NRIs and FPIs. Their participation will foster liquidity in contracts enabling more cost-effective hedging and enhancing overall market efficiency.
At the same time, the authorities must also create provisions to initiate trading in options and intangible commodities. Options and futures share a symbiotic relationship, and these products offer participants the option to execute several strategies from hedging and investment.
Conclusion
The Indian commodity derivatives market has seen immense progress in participants and product offerings. However, more actions could lead to solid momentum and market strength in the years to come.
In the post-Covid era, commodity derivatives markets are set to witness the following–(1) Increased integration between spot and futures markets, (2) High liquidity derivative instruments, and (3) diversified market participants in the ecosystem.
In the days to come, the commodity derivatives market is poised to realize its true potential and play a critical role in supporting the Indian economy.
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