Finance @ Knowledge Zone


Commodities Market in India

- by Tushar Kulkarni *

Part - I

Derivatives Market In India

Derivative markets can broadly be classified as commodity derivative market and financial derivatives markets. As the name suggest, commodity derivatives markets trade contracts for which the underlying asset is a commodity. It can be an agricultural commodity like wheat, soybeans, rapeseed, cotton, etc or precious metals like gold, silver, etc. Financial derivatives markets trade contracts that have a financial asset or variable as the underlying. The most popular financial derivatives are those, which have equity, interest rates and exchange rates as the underlying. Financial derivatives are used to hedge the exposure to market risk. The commodity derivatives differ from the financial derivatives mainly in the following two aspects: Firstly, due to the bulky nature of the underlying assets, physical settlement in commodity derivatives creates the need for warehousing. Secondly, in the case of commodities, the quality of the asset underlying a contract can vary largely.

Some of the major market players in commodities market are: -

  • Hedgers, Speculators, Investors, Arbitragers

  • Producers - Farmers

  • Consumers - refiners, food processing companies, jewelers, textile mills, exporters & importers

Commodities Market In India

India has a long history of futures trading in commodities. In India, trading in commodity futures has been in existence from the nineteenth century with organised trading in cotton, through the establishment of Bombay Cotton Trade Association Ltd. in 1875. Over a period of time, other commodities were permitted to be traded in futures exchanges. Spot trading in India occurs mostly in regional mandis and unorganised markets, which are fragmented and isolated.

There were booming activities in this market and at one time as many as 110 exchanges were conducting forward trade in various commodities in the country. The securities market was a poor cousin of this market as there were not many papers to be traded at that time.

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* Contributed by -
Tushar Kulkarni,
B.E. (Electronics), Vivekanand College Of Engineering, Mumbai,
II Year - PGDBM, Sydenham Institute Of Management, Mumbai.