NCDEX to launch tradeable agri index to hedge risk in underlying commodity

The National Commodity & Derivatives Exchange (NCDEX), India’s largest agri-centric commodity futures trading platform, is planning to launch first of its kind a tradable composite agri index “Agridex” by the end of May which will be open for retail and institutional participants to hedge risk in the underlying commodities.

The cash settled agri index comprises 10 leading liquid contracts on NCDEX platform which includes soybean, chana, coriander, cottonseed oilcake, guargum, guar seed, mustard seed, refined soy oil, castor seed and jeera. The value of this index is generated based on the spot and futures of these underlying commodities.

All these commodities would have different weightage in this index depending upon the liquidity on the exchange platform and their production and consumption along with significance in the physical market.

“NCDEX had launched its first agri index ‘Dhaanya’ in 2012 which was later renamed as ‘NKrishi’. But, this index was not tradable. As per the regulatory guidelines, the weightage is given 50:50 according to the size of the commodity in physical markets and volume generated on NCDEX. If things go as per the plan, we will launch this tradable index by the end of the current month,” said Kapil Dev, Head (Product and Business Development), NCDEX.

As per the existing plan, soybean would have the highest weightage in the commodity index followed by chana, guarseed and refined soyoil etc.

Currently, the minimum threshold of any commodity to remain in the composite index stands at Rs 75 crore of average daily turnover in the last one year with a room for relaxation of 20 per cent. In case this threshold declines by 20 per cent, the commodity would be replaced with another one available on the exchange platform. The index would be re-balanced in March every year with entry and exit of commodity that breaches the minimum threshold of average daily turnover and also, availability of that commodity for futures trading.

The exchange is also working on commodity specific indices to make them available for trading. But, their launch would take some time, said Dev.

“Currently, we are focusing our energy on ‘Agridex’. Product specific indices would be launched later. But, we are aggressively working on agri specific indices also. The index would help retail participation for cash settled contract and also large playerrs like mutual funds to use this index as a hedging tool in underlying commodities,” said Dev.

‘Agridex’ is different from ‘NKrishi’. While ‘Agridex’ conforms to all regulatory requirements and tradable also, ‘NKrishi’ was an indicative index which was meant only for internal reference. Also, ‘Agridex’ is a return-based index as against ‘NKrishi’ being purely a price-based one. So, liquidity will determine the participation of any commodity in ‘Agridex’. For futures, there is a expiry and rollover of position which attracts some costs.

“To adjust that rollover cost, we have made it return based index which is driven purely by futures trading prices. Every first three days of basis returns being generated in the underlying futures, the value of the commodity is generated,” Dev added.

The value of ‘Agridex’ will be generated by NSE Indices Ltd, the indices arm of the National Stock Exchange (NSE) which also calculates value of Nifty and other indices on NSE. Interestingly, NSE holds 15 per cent stake in NCDEX.

“Being deliverable and storable agri commodities will not have any room for negative pricing as seen in the case of crude oil on Nymex and its repercussion on one Indian exchange. Hence, the threat of negative pricing does not exist,” said Dev.

Talking about the timing of the ‘Agridex’ launch that coincides with the initial public offering (IPO) of NCDEX, Dev said, “We were working hard with the regulator to grant us permission to launch indices trading. The permission has been granted now. Hence, the launch of ‘Agridex’ is independent to the IPO.”