NCDEX suffers major losses as suspension of futures gets extended

As market regulator Securities and Exchange Board of India (Sebi) extended the suspension of futures in seven major agriculture commodities for one more year till December 20, 2024, data shows that NCDEX, which is one of the major exchanges dealing in farm commodities, has seen a reversal in fortunes.

Futures trading in the seven commodities, which was first suspended on December 20, 2021, contributed to almost 70 per cent of the exchange’s volumes. And, loss of these contracts resulted in a major downfall in deposits and deliveries.

The commodities are paddy (non-basmati), wheat, chana, mustard seed and its derivatives, soybean and its derivatives, crude palm oil and moong.

The members participating in the NCDEX exchange platform have also fallen sharply.

Data shows that between March 31, 2022 and March 31, 2023, the membership in the exchange dropped by almost 9 per cent to 309. 

Sources said between March 2023 and September 30, 2023, another 25-30 members left the exchange.

Also, the number of terminals has dropped by 46 per cent between March 2022 and March 2023. Commodities delivered have fallen by almost 52 per cent between March 2022 and March 2023 from 472,000 tonnes to 228,000 tonnes. This has further squeezed to 102,000 tonnes by September 30, 2023.

Commodities deposited with NCDEX also dropped by 51.75 per cent between March 31, 2022, and March 31, 2023, from 512,000 tonnes to 247,000 tonnes. This further went down to 129,000 tonnes by September 31, 2023.

This suspension also impacted the financials of NCDEX. Data shows that the total income of the exchange in FY23 was Rs 48.84 crore, a decrease of 39 per cent over FY22.

This was primarily on account of lower average daily traded value (ADTV) of Rs 834 crore in FY23 compared to Rs 1,851 crore in FY22.

NCDEX’s loss after tax widened to Rs 44.45 crore in FY23 from Rs 13.76 crore for FY22.

The exchange recorded an ADTV of Rs 834 crore in FY23 and an average daily open interest (ADOI) of Rs 2,069 crore.

Sources said all this has happened despite multiple studies and reports finding no direct correlation between futures trade and inflation.

A study done by IIM Ahmedabad, a few months back, found no evident association between the futures market trading volumes and spot prices of the suspended commodities.

It said that in view of its findings, it is ideal to have a standardised approach to deal with a case of “suspected price manipulation” in the futures markets, which leads to abnormal price rise in the spot market.

It said if upon scrutiny, the abnormal movement in the indicators are linked to an abnormal trading pattern, then further margin and position limits may be imposed at the trader level, or at the exchange level for the commodity contract.

“Only as a last resort, does the futures market suspension need to be considered, as an orderly and liquid futures market provides valid signals about future spot prices and avoids distortions in the market. Moreover, it offers an in substitutable vehicle for cost-effective hedging of commodities price risk,” the report concluded.

Before, this, another study done on mustard and chana by Nidhi Agarwal from IIM Udaipur, Tirtha Chatterjee of Jindal School of Government and Public Policy and Karan Sehgal, a research scholar at IIM, found that there was no evidence that derivatives trading leads to higher prices or suspension of their futures had any impact in bringing down the price volatility.

It found that price movement in commodities with no futures is uncontrolled and likely to be more volatile than commodities that have a footprint in the derivatives segment. This is because they are bound by position limits, margin requirements and daily price limits.

“The analysis showed that mustard oil prices would have had a similar trend even without suspension,” the study showed.

Rather, the study found that before suspension of the futures market, it had a dominant share of 64 per cent in uncovering the true price of mustard seed. “This role ceased because of the ban,” it added. There was a similar finding for chana.