Survey bullish on agri-commodity futures

The Economic Survey 2006-07 is bullish on commodity futures, though it is silent on the issue of allowing mutual funds in commodity futures.

Contrary to the market buzz that the Centre may ban futures trading in more agri-commodities, the survey says the commodity exchanges, which have seen a consistent growth in turnovers over the past few years, may remain vibrant in 2007-08, witnessing bigger volumes and higher values.

Gold and crude oil account for the major part of the transactions in the futures market, it says, adding "other commodities, particularly agricultural commodities, are expected to gain importance".

And based on these observations, the market seems assured not to see expansion of the list of banned commodities.

Sunil Ramrakhiani, head-commodities, IL&FS Investsmart, said, "If we go by what the survey says then we don't expect any more delisting/ banning of commodities for futures trading. Further, after the government does proper study the ban already put (on tur and urad) may also be withdrawn."

Futures were giving true signals and if futures prices were high, the government would have to take measures to control the spike and not remove the signalling mechanism, he added.

The observation assumes importance in view of the government ban on tur and urad. The market is currently fearing further strict measures and banning of more such commodities. Indications were that the decision to ban the futures was taken at the behest of the finance minister who wanted to take some symbolic measures to stem inflation.

The agriculture minister too hinted that there was strong opposition to agri-commodity futures and, hence, he was considering setting up of an expert committee to deliberate on the issue.

But the survey presented by the finance minister goes on to say agri commodities will gain importance, adding "futures in agriculture commodities will help the price discovery process, thereby providing farmers with opportunities".It also says the proposed amendments to the Forward Contracts (Regulation Act), 1952 are expected to strengthen the regulatory aspects and ensure orderly conditions in the commodity futures market.

The survey also offers an interesting reading on growth in turnovers of the commexes. It says gold and silver account for the half of the total turnover, while guar seed and chana make up for 11 per cent and 10 per cent, respectively.

The total volume of futures trade surged to Rs 27.39 lakh crore on December 31, 2006 from Rs 1.29 lakh crore in 2003-04. The volume in the first nine months of 2006-07 surpassed the Rs 21.55 lakh crore achieved in the whole of 2005-06.

Turnover as a proportion of GDP rose from only 4.7 per cent in 2003-04 to 18.3 per cent in 2004-05 and further to 76.8 per cent in 2005-06. Within that, the MCX accounted for 59 per cent market share, followed by NCDEX with 34 per cent and NMCE with 4 per cent.

The survey says, "MCX emerged the largest commodity futures exchange during 2006-07, both in terms of turnover and the number of contracts. Its growth in 2006-07 is comparable with some of the global commodity exchanges such as GSCI (Goldman Sachs Commodity Index), DJAIG (Dow Jones AIG Commodity Index Cash Index) and RJCRB (Reuters/Jefferies Commodity Research Bureau)."