[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
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REIMAGINING INDIA<br />
commodity derivatives ecosystem. Firstly,<br />
the functional autonomy of the Forward<br />
Markets Commission (FMC) – the<br />
regulator for the commodity markets, as<br />
proposed in the FCRA would make it<br />
more vibrant in the eyes of the market<br />
participants and policy makers and other<br />
regulators such as RBI and SEBI.<br />
This could help facilitate entry of other<br />
participants such as banks and mutual<br />
funds as their regulators namely RBI<br />
and SEBI respectively develop confidence<br />
in the functioning and regulation<br />
of the markets. Further, new products<br />
such as options will offer the stakeholders<br />
(least risk appetite) with one more<br />
instrument for risk management. This<br />
could be more suited to farmers participation<br />
as they are less risk-hungry and<br />
could help them overcome the liquidity<br />
problems that they would otherwise face<br />
in the futures instrument in meeting the<br />
daily MTM margin requirements. <strong>The</strong><br />
entry of banks, MFs and foreign institutional<br />
investors (FIIs) would enhance<br />
the liquidity and professionalism in the<br />
markets and thereby bolstering the efficiency<br />
of the Indian commodity markets,<br />
which is essentially needed at a time<br />
when the country’s market is being<br />
opened to traders and investors from<br />
across the borders. Perhaps, with banks<br />
allowed it could even facilitate farmer’s<br />
participation helping them overcome the<br />
present hurdles in their participation.<br />
<strong>The</strong> permission to launch index-based<br />
instruments following the amendment to<br />
FCRA would open the doors for exchanges<br />
to come out with derivatives<br />
such as index linked futures and options,<br />
sector based derivatives, and weather<br />
derivatives. While rocketing in the current<br />
high-growth trajectory, the domestic<br />
exchanges have also effectively adopted<br />
global best practices from the<br />
<strong>The</strong> permission to launch index-based instruments would<br />
open the doors for exchanges to come out with derivatives<br />
such as index linked futures and options, sector based<br />
derivatives, and weather derivatives<br />
benchmark exchanges to leap forward<br />
and attain higher levels of efficiency and<br />
trading volumes. In turn, these efficient<br />
marketplaces with right products and<br />
participation are likely to transform the<br />
economy’s competitiveness and help<br />
raise the global competitiveness of Indian<br />
products and services This would<br />
help India to become an efficient global<br />
manufacturing hub and shore up its performance<br />
on the external trade front.<br />
Given all the positive effects of the futures<br />
exchanges to the economy and the<br />
markets, the growth in the commodities<br />
sector has been unsupported unlike its<br />
financial derivatives counterpart.<br />
All in all, one must acknowledge that<br />
given the current trend in globalization<br />
of economies, competitiveness would<br />
remain a major factor affecting the performance<br />
of many of these economies<br />
and may even determine their survival<br />
in a more liberalized trade environment.<br />
As production determines part of the<br />
costs of the product or a service so is<br />
its marketing cost. <strong>The</strong> more efficiently<br />
commodities are marketed in an<br />
economy could solve a part of the<br />
problem that India is facing in moving<br />
up the ladder in its trading competitiveness.<br />
As goods and services becomes<br />
cheaper due to reduced cost of<br />
marketing it, such as through reduced<br />
wastages through quality production,<br />
standardization and grading, and scientific<br />
storage, paying the intermediary<br />
the right value for the services that<br />
he renders to the marketing of the<br />
commodity. Increased marketing efficiency<br />
coupled with increased production<br />
efficiency is likely to help India remain<br />
competitive. For increased market<br />
efficiency, it is necessary that there are<br />
efficient futures markets that help the<br />
producers and value chain players take<br />
effective production and marketing decisions<br />
to reduce the cost of marketing.<br />
Hence no one can deny that efficient<br />
markets are as much important as like<br />
the efficient industries or the agricultural<br />
production systems that would efficiently<br />
produce primary or the processed<br />
products to help our economy<br />
remain competitive and there is no other<br />
alternative to the commodity derivatives<br />
trading that can bring about necessary<br />
efficiency in the existing<br />
market ecosystem.<br />
106<br />
THE <strong>IIPM</strong> THINK TANK