Not by auto-pilot

The commodity exchanges may have begun attracting large volumes of business, but they are yet to acquire the efficiency and sophistication displayed by the stock markets. A recent study by the Associated Chambers of Commerce and Industry predicts that the Indian commodity futures market will grow to a whopping Rs 12 lakh crore in the next four to five years, from barely Rs 3.4 lakh crore now.

This is not surprising, considering that commodity markets globally are about three times the size of equities markets. If this forecast is to materialise, it is absolutely imperative that there should be fair and transparent transactions on the futures exchanges and equal opportunity for trade in all commodities.

At present, gold and silver account for the bulk of the trading. The volumes in other metals, as also the agricultural commodities for which these exchanges were primarily established, are relatively small. Among the exchanges, just two (NCDEX and MCX) account for nearly 90 per cent of the total transactions.

In sharp contrast, regional exchanges not only clock low trading volumes but also, by and large, do not follow the laid-down standards. Moreover, the single-commodity exchanges often operate on the basis of distorted settlement prices.

And, on top of that, there are concerns of much greater significance, such as lack of transparency in trading procedures, the existence of arbitrary settlement systems, lack of proper trading supervision, and the absence of a safe and enforceable margin system.

Most of these ills are attributable to the inefficiency of the present regulatory framework and the weaknesses of the Forward Markets Commission (FMC). The ineffectiveness of the FMC is reflected also in occasional undue exploitation of the markets by speculators. The recent abnormal spurt in the futures prices of little-known commodities like guarseed and zira (cumin seed) bears this out.

What seems to be obvious under the circumstances is that the job of regulating the commodity exchanges needs to be entrusted directly or indirectly to the Securities and Exchange Board of India (Sebi). This can be done either by merging the FMC with Sebi or bringing it under Sebi's overall control, or even dismantling the FMC and holding Sebi directly responsible for overseeing the functioning of the commodity exchanges.

Such a measure sounds logical also because most of the players on the commodity exchanges are the same who trade in equities and Sebi by now has become familiar with the kinds of games they normally play.

This aside, there are several other measures that should be taken to help commodity futures grow on the right lines. Many bodies, including an expert committee of the Reserve Bank, have suggested that banks, mutual funds and financial institutions should be allowed to enter these markets.

Besides, market- and price-distorting policies like fixation of minimum prices, monopoly procurement, and monthly sale quotas need to be scrapped to let futures trading in commodities serve the purposes for which it was re-introduced in 2003.

Without these steps, the bright future held out in the Assocham study will remain a chimera. So, auto-pilot is not the answer; some manual guiding of the growth of these exchanges is required.