[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...

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