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Imposition of a commodities transaction tax (CTT) on trading in non-agricultural products from July 2013 appears to have significantly hit the commodity derivatives segment.
Volume has been falling for quite a while on the commodity derivatives exchanges (comexes). Last month's turnover was the lowest since December 2008.
A shift of commodity market traders to other ones such as equities and weakening prices are among the other reasons explaining the fall in futures volumes.
Commodity futures was a Rs 178 trillion market in 2011-12. The market has been falling since. In the current financial year till August, volumes have fallen significantly over a year before. Taking the five-month volume and annualising it comes to Rs 60 trillion, the lowest after 2009-10.
Commodities prices took a huge hit after the global economic turmoil subsequent to the Lehman Brothers’ debacle in September 2008. A CTT was made effective on July 1, 2013. Since then, jobbers, arbitrageurs and day-traders appear to be shifting elsewhere. Among the three main exchanges, the Multi Commodity Exchange and the National Multi Commodity Exchange have been hit the hardest. The National Commodity & Derivatives Exchange, predominantly into agri commodities, has seen lesser impact of falling volumes.
“The CTT levy increased trading cost, making the business unviable for jobbers, arbitrageurs and day-traders. These segments found huge trading opportunity in commodities futures earlier, when CTT was not in existence. They gradually moved out of the commodity futures market,” said Sugandha Sachdeva, incharge of metals, energy & currency research at Religare Securities.
Apart from a levy on non-agri commodities, the government brought many processed agricultural commodities under the transaction tax net. With this effect of 0.01 per cent (Rs 10 for Rs 100,000 of trade) of CTT, the cost of commodities’ transaction rose 800 per cent.
In his 2013-14 Budget speech, then Finance Minister P Chidambaram had stated that CTT — on the lines of the Securities Transaction Tax in the capital market — would be levied on non-farm items, to be paid by the seller only in futures trading. Since CTT was made effective in July 2013, comexes have lost business by at least 50 per cent.
Apart from that, weak sentiment currently prevails in this market due to the Rs 5,600-crore payment crisis since July last year at the National Spot Exchange. The daily commodity exchange volume has fallen from about Rs 65,000 crore a year before to about Rs 25,000 crore now.
“Introduction of CTT, low participation of traders and rising global equity markets are the primary reasons for the fall in comexes' turnover,” said Naveen Mathur, associate director, commodities and currencies, Angel Broking.
Rising equities in the US and a strengthening dollar (currently trading at four-year highs) have led to a correction in commodities, largely creating a bearish sentiment. This has created low participation in commodities as an asset class. Gold and silver were the highest trading commodities but a crash in prices and import curbs, along with waning interest of investors, have added to the problems.
