MCX plans diamond futures

The Multi Commodity Exchange of India (MCX), India's leading commodity exchange, is planning to launch rough diamond futures soon.

For the last year and a half, the exchange has been working overtime to arrive at an unified standard but is yet to arrive at an acceptable one. An exchange official said that it would standardise a uniform benchmark in the near future.

B C Khatua, chairman, Forward Markets Commission (FMC), the commodity markets regulator, is mulling index futures in rough diamonds.

"A small change in cuts and polishes change the standard and, thereby, the price. Hence, a uniform standard is very difficult to arrive at. In such commodities, only index futures can be thought of," Khatua said on the sidelines of the International Diamond & Gold Convention in Mumbai.

India is one of the best polished diamond markets in the world thanks to its world-class quality diamonds as well as exquisite cutting skills. Over 83 per cent of the country's gems and jewellery that are cut and polished account for exports. Surat and Jaipur are famous for their top notch polishing and designing centres.

The domestic diamond jewellery market is estimated at around Rs 8,000 crore per annum in retail value. The demand for jewellery is dependent on gross domestic product growth, which is expected to be high in the near future.

Because of increased disposable income and the industry's aggressive promotion strategies, the demand in India is likely to remain upbeat in months ahead.

Diamond jewellery demand has increased significantly in recent years, from Rs 1,970 crore in 1995 to around Rs 8,000 crore in 2005. The demand in retail value has remained stable at around 71 per cent.

India presently sources roughs from Antwerp, despite having the capability to import, cut and polish all types of diamonds directly. This process only increases input cost, resulting in jewellery items getting costlier in comparison with the nearest competitors, Israel and China. The rupee appreciation is also hurting finished jewellery exporters as imports of roughs have become costlier.

Hence, futures trade in rough diamonds would not only help them hedge against currency appreciation and the demand-supply position, but also to concentrate on designs, cuts and polishes - what the industry basically is known for.

Importantly, Indian jewellery makers have started using roughs more in jewellery meant for weddings. According to Preeti B of Tara Jewellery, about 3-4 per cent of total diamonds consumed in wedding jewellery are used as rough, cut but not polished, the demand for which is growing rapidly.