NCDEX's agri index launch by Diwali, chooses NSE IT to manage product

The index will have 10 Sebi-approved agri commodities. Once open for trading, the NCDEX index for agri and MCX index for non-agri commodities will theoretically complete a basket

Derivatives trading in commodity indices will start in two-three months, with the National Commodities and Derivatives Exchange (NCDEX) also joining the Multi Commodity Exchange (MCX) in launching its indices for trading.

The NCDEX is finalising with NSE IT, an indices company, to prepare its agri index, which meets the regulatory norms for tradable indices. 

The exchange has designed a composite agricultural commodities index, with a few sectoral indices. 

The plan is to begin with an agri index.

Trading will begin after approval from the Securities and Exchange of India (Sebi) is secured.

The MCX had prepared indices along with Thomson Reuters two years back and the exchange is planning a non agri index derivatives in the next one or two quarters. The NCDEX had the Dhanya index, which reflects agri commodities movements but for trading that will not be made available. 

The Dhanya index has been renamed as NKrishi index.

Sources said the NCDEX index, which will be launched for trading, will be return-based, unlike the Dhanya index, which is price-based. The index will have 10 agri commodities as constituents that meet Sebi criteria for index inclusion. Once available for trading, both indices, one from the NCDEX for agri and one of the MCX for non-agri commodities, will theoretically complete a basket.

The agri and non agri segments usually have no correlation and the index movements can be different and track different developments.

Globally several players hedge in indices. For example, in India agriculture is monsoon-dependent and in the case of a weak monsoon, one can buy the agri index to go long because usually agri prices go up in such a scenario. In the event of US-China trade war, growth slowdown is seen as a logical fallout and metal prices fall when growth is expected to slow. In such a situation, a metal mine or a smelter can sell the metal index to hedge its risk. As metal prices fall, their realisation from sales of metals fall. Shorting the metal price index will result in gain when prices fall and loss in selling metals can be made good by this hedging. 

Globally even institutional and financial investors prefer indices to hedge their risks, rather than taking positions in single-commodity futures. Globally index derivatives have been a high volume generator.