The Indian Commodity Markets Finance Essay

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Words: 2017

Date added: 17-06-26


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The Indian commodity markets have come a long way since the establishment of the informal trading platforms, both in terms of trading volumes and the stakeholders involved in the commodity markets. The recent global economic downturn resulted in significant job losses and large scale unemployment across a spectrum of sectors. However, the agricultural and food sector had been considerably secured from the effects of this downturn, with little job losses. Also, since agricultural activities , still being the mainstay and one of the most significant contributors to the Indian economy, it becomes significantly imperative for the presence of regulated formal trading platforms and establishment of authorized exchanges and bourses to overlook the large volumes of transactions in a secure and formalized manner. This would , apart from keeping a check on malpractices and frauds also facilitate in governing the overall process of the transaction in a highly efficient and transparent manner, also competitively enable to generate the right and fair prices for the farmers and other stake holders involved, thus gradually developing the ideal perfect market scenario in the Indian context.


Statement of the Problem

To study the Indian Commodity Markets & the impact of regulated commodity exchanges for the Indian agricultural sector.

Purpose of Study

Significance of Study

The Indian commodity markets have come a long way since the establishment of the informal trading platforms, both in terms of trading volumes and the stakeholders involved in the commodity markets. Hence it becomes significantly imperative for the presence of regulated formal trading platforms and establishment of authorized exchanges and bourses to overlook the transactions in a secure and formalized manner. This study hence focuses mainly on the impact of such formalized bourses on the most largely traded commodity, i.e. agricultural products markets and the resultant effect on the overall agricultural sector of the country.


The most significant aspect of a research paper is the overall structure and the systematic flow of data which is adhered to in order to convey the crux of the matter. The data to be assessed for the research would basically consists of two major kernels of data collection and assessment i.e. the primary and the secondary data. The secondary data would majorly consists of the work of previous researchers, their research works and thesis and information gathered from encyclopedias , journals and magazines relevant to the area of study. This data would form the background and lay the foundation for the further study and would frequently be referred to during the scope of the research work. This secondary data is significantly based on the work extracted from online libraries and encyclopedias like JStor and MPRA. The primary data will be majorly based on the significant factors which are synergetic between commodities and commodity exchanges, in turn, affecting the nuances of the Indian agricultural sector and its subsequent stakeholders.


In the research work, Indian Agricultural Commodity Futures Markets : A Performance Survey, Dr. Kedarnath Mukherjee has thrown light upon the gradual evolution of trading patterns in commodity products both OTC (Over The Counter) and at exchanges, regulated and unregulated. Significantly, acute focus has been the vast number of agricultural commodities and their byproducts which are traded in several exchanges extensively .this paper basically examines six different commodities , which have been traded long enough , to enable their performance to be evaluated. The assessment is primarily based on the evaluation of the member-ship pattern over time, extent of liquidity, price volatility, basis1 risk, and pattern. The results indicate that most of these markets are yet to develop fully as efficient mechanisms of risk management and price discovery. Also examined is the co-integration between futures and cash markets, efficiency, and lack of bias to reflect their performance in discovering prices . In the Impact of Futures Trading on Indian Agricultural Commodity Market ,Dr. Kedarnath Mukherjee through the medium of this research study makes an attempt to re-validate the impact of futures trading on agricultural commodity market in India and emphasizes on the significance and instrumentality in establishing the agricultural commodity market, by focusing on futures contract .Various econometric models are used and data from the daily price information in spot and futures markets, for a period of 7 years (2004 - 2010), for 9 major agricultural commodities is taken from different categories of Agri-products is fed in to the models. The empirical findings significantly throw light on the comparative parallel advantage of futures market in deciphering information, leading to a significant price discovery and risk management, that can again help to successfully evolve the underlying commodity market in India. The study focuses on the pressure of inflation from commodity, significantly agricultural commodity, where observations show that prices have acutely risen after the establishment of future contracts. Since the future contracts have a very casual destabilizing effect, varying over a long duration of time, instead of curbing the commodity futures market, it can always be suggested to strengthen the market structure to achieve the wider scope of the target. In the research work, Implications of Economic and Financial Crisis for Agricultural Sector of India, Deepak Shah, (March 2012) , has showcased that although the global economic downturn has resulted in large-scale job losses and mass unemployment in many export-oriented sectors, the situation in food and agricultural sector has remained stable with little job losses. However, since agricultural sector in India has somewhat different entity, the impact of global crisis in this sector is seen to have percolated in varied forms. During the period of slowdown when there stood virtual ban on foodgrain exports, the raw sugar was subjected to zero import tariff, leading to widespread protest by the sugar industry. The "free" imports of raw sugar raised concerns regarding cultivation of sugarcane in the country. Adequate control obviously needs to be exercised on the domestic prices of all essential commodities of common consumption, including sugar. Interestingly, despite decline in income elasticity of demand for cereals in India, the low-income groups still show positive income elasticity of demand for cereals, indicating little tendency of decline in demand for cereals even if income falls marginally. This not only ensures higher demand for farm produce but also significantly high demand for labour in agriculture. However, the global economic recession has certainly compounded the problems of cash crop growers as the farmers producing cash crops saw lower prices on offer for their produce despite rise in food prices. Further, though prices of edible oil in India declined due to crash in world prices of oilseeds, the price of non-food primary products hardly changed. Nonetheless, the major cause of concern for the food sector of India is the 10 per cent rise in wholesale prices of cereals between December 2007 and December 2008 period as this has resulted in reduction in real income of all urban and rural household. Although government has resorted to initiate some measures to check prices, there still stand various other measures to be initiated to safeguard Indian economy from global economic slowdown. In the research work , An evidence of speculation in Indian commodity markets, the author, Vijay Kumar Varadi, ICRIER, New Delhi, India , has focused on the recent price surge in commodity markets which has stipulated intensity of various factors which lead price volatility. There are multi-factors such as traditional supply and demand factors, excess global liquidity i.e., monetary inflows in commodity markets and financialization i.e., financial investors (portfolio investment and speculation) attitude. This paper is an attempt to investigate for the evidence and its impact of speculation on volatility of commodity prices in Indian commodity markets. Overall, results show that speculation has played decisive role in the price bubble during the global crisis. The research work by Modena and Matteo, Agricultural commodities and financial markets, Universita Cattolica del Sacro Cuore, Milano focuses on the strong inverse correlation between financial markets' returns and the movements of food commodity prices. The sharp raise of the price of agricultural commodities between 2006 and 2008 seems to have a rationalization that goes beyond the mere interaction between supply and demand. Moreover, such an inverse relationship has clearly emerged during the recent financial crisis. The authors throw light on the fact that the financial factors, instead of other determinants, play a significant part in determining the dynamics of agricultural commodity prices. In particular, there seems to be a common source underlying food price changes and the financial markets dynamics. The authors have categorically layed down facts to strengthen the opinion that portfolio adjustments of financial agents are the main factor for large fluctuations of food commodity prices. Pankaj Kumar Gupta and Sunita Ravi , Centre for Management Studies, JMI University, New Delhi, India in their work Commodity Market Inefficiencies and Inflationary Pressures - India's Economic Policy Dilemma have highlighted the fact that with the advent of the economic liberalization and the subsequent large scale investments in the Indian markets, there is a general consensus that India would emerge as a major player in the international market in terms of commodity consumption, production and trade. As per the figures suggested by the trade volumes and price varying and price decisive factors of commodities, the futures and spot markets have shown major variations. The prime significance of the study lies in the fact that it tries to indulge in the regulatory aspects of the governing bodies towards commodity exchanges, and categorically explores the extent to which futures trading be allowed on the commodity exchanges and how to curb and patch the loopholes in the commodity market. This research study vividly and conclusively focuses on the fact that one of the most significant reasons for the integration of the domestic and international financial markets has been the increased volatility in asset which has in turn led to the accentuating in the demand for the trading in the derivative market. With the establishment of regulated commodity exchanges, a great boost has been provided to speculators, hedgers and other market participants to capitalize on the development and has exponentially increased the trade volumes of the commodity derivative markets in the new form with nationwide electronic trading . Liquidity booms reflected by loose monetary policy are responsible for major surge in commodity prices globally in addition to direct tangible impacts of oil prices especially in developing countries with heavy oil imports like India. Huge price volatility in futures segment on the commodity exchanges has therefore raised concerns relating to the market efficiencies, infrastructure and knowledge and also their consequential impact on cash markets. Climatic conditions, availability of critical inputs and government policies are imperative factors which are responsible for the demand and supply side of the commodity price mechanism .This research paper also focuses on the important aspect of the consumer wholesale price index , and its governing factors. The study also highlights certain significant issues and tries to answer important dilemmatic questions such as - (a) to import or not? (b) What should be the interest rates reflected by the monetary policy, (c) can we or should we control monetary inflows from outside? (d) Should we support the farmers or the consumption masses?
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