INCREDIBLE MCX?

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For the uninitiated, as a futures commodity exchange, MCX offers a platform to producers, sellers and hedgers to get an indication of future prices for their raw materials, so that they can reduce their exposure to future price risks, besides allowing for price discovery in respective commodities. The MCX management links the futures market to insurance. If you have a health problem, you take insurance; fluctuating prices are a risk for both producers and sellers, and the futures market is an insurance against that, they aver.

Of Pains & Prejudices
But despite all efforts to the contrary, prejudices and suspicions regarding commodity futures persist. For one, the blame for the spiraling prices of commodities, including grains and edible oils, over the last couple of years is being placed squarely on the shoulders of the speculation and hedging that goes on in commodity exchanges. Result: policymakers and bureaucrats are making it a habit to de-list commodities that show high price volatility in these inflationary times. If last year, comexes faced a setback due to a ban on wheat, rice, urad and chana; in May this year, the government de-listed another four commodities from the market, fearing that hoarding and speculation was driving up prices. Comexes lost out in the bargain. “But there’s no link in price rise and commodity futures trading. Last year futures trading in rice and wheat was banned. Inflation was 6.5% then. One year hence, with inflation at 11.42%, prices of rice and wheat have almost doubled without any futures trading in these items,” reasons Naveen Mathur, Head, Angel Commodities. Given that in India, the agricultural sector is driven by more political interests than commercial, Naveen is not the only one crying foul over routine policy flip flops and political intervention over futures trading in agro commodities. Even the Abhijit Sen Panel report, studied the impact of futures trading on price rise and recently submitted its report giving them clean chit.

Be that as it may, such political and bureaucratic interference has not made as much of an impact on MCX’s fortunes (self-admittedly agri commodities form only 10% of the entire trading volume on MCX), as opposed to NCDEX where agri commodities comprise a bulk of their trading total. And that perhaps is a key reason for MCX’s gravity defying growth. “Since the beginning, MCX concentrated on international commodities like crude oil, bullion, energy and non-ferrous metals, believing that government interference would be low,” explains Amar Singh, Head-Commodities Research, Angel Broking.

When the government revoked a four decade ban on commodity futures trading, of the three national commodity exchanges that came up in 2003, MCX appeared to be the weakest link of the lot, with a humble, small-time technology entrepreneur Jignesh Shah at its helm. The other - NCDEX was a powerful ICICI consortium backed exchange. In fact, in the initial year it was NCDEX that was on an average performing better than MCX. But Shah and team quickly turned the tables with their focus on global commodities, customised products (or contracts) and their awareness campaigns. As a result, MCX beat NCDEX fair and square in terms of trading volumes.

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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