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Indian Commodity market shrinks, traders shift to equities

Mumbai: Turnover on India’s commodities markets has shrunk by two-thirds as higher transaction costs, a drop in gold imports and a payments crisis at the National Spot Exchange Ltd (NSEL) take their toll on the confidence of investors.

In terms of value, turnover has dropped from a daily average of Rs.55,538 crore in April, the first month of the financial year, to Rs.18,373 crore in November.

Analysts say traders are turning to the futures and options (F&O) segment of equities from commodities amid an uptick in stock indices.

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“A lot of short-term traders are shifting to equity F&O as they are finding equity to be more promising than commodities,” said Ashok Mittal, co-head of retail brokerage at Emkay Global Financial Services Ltd, attributing this to “increasing margins in commodity trading and the NSEL fiasco”.

BSE’s bellwether equity index, the Sensex, rose to a lifetime high of 21,483.74 points on Monday and ended Tuesday 0.33% lower at 21,255.26 points. Since January, the Sensex has risen 9.41%, making it the top performer among the world’s four largest emerging markets.

Foreign institutional investors (FIIs), the main driver of Indian stocks, have pumped close to $18 billion into India’s $1.1 trillion stock market in the current calendar year, making it the second most attractive destination for foreign money in Asia, only behind Japan.

The average daily F&O turnover on BSE and the National Stock Exchange rose to Rs.1.77 trillion in November from Rs.1.66 trillion in April. The average turnover, in fact, crossed the Rs.2 trillion mark in two consecutive months—July and August.

Analysts say the introduction of the commodities transaction tax (CTT) has led to an escalation in the cost of trading, causing the steep drop in turnover on commodities markets.

Finance minister P. Chidambaram, in his February budget, introduced CTT at the rate of 0.01% to be paid by the sellers. CTT has been levied on non-agricultural commodities, including gold, sugar and edible oils, with effect from 1 July. The tax is levied on futures trading in commodities. Besides gold, silver, crude oil and base metals, processed agricultural products like sugar, soya oil and guar gum are also covered by CTT.
“There has been decline in interest in commodity (trading) due to introduction of CTT which has significantly increased the cost of trading in commodities,” said Hitesh Jain, a research analyst who looks at commodities, metals and currencies at India Infoline Finance Ltd. “Usually speculators used to dominate trading in commodities…(they) used to make profits on very narrow spreads. Increasing transaction cost has dissuaded them from trading in commodities.”

Investor interest in commodities has also been eroded by the decline in the economic growth of China, he said. China has traditionally been a big buyer of commodities.

Kunal Shah, head of commodities research at brokerage Nirmal Bang Securities Pvt. Ltd, said it makes sense for traders to move away from commodities to equities. According to Shah, because of a rise in import duties and restrictions on gold imports, the precious metal has been trading at a premium and people were shying away from investing in gold, the second most expensive item on India’s import bill after oil.
Because of government policies, the premium on gold has increased by $125 per ounce, impeding timely delivery under gold contracts, said Prithviraj Kothari, managing director of RiddiSiddhi Bullions Ltd, a bullion trading company.

“This is hurting the sentiment and impacting the (trading) volumes,” he said.

Many say that it is a temporary phase and commodities trading will look up once the situation is resolved at NSEL, which is battling a Rs.5,575.34 crore payments crisis that surfaced at the end of July.

“Most who trade in commodities will return as market reforms are implemented and trust is regained in the commodity markets which is eroded due to the NSEL fiasco,” said Kishore Narne, head, commodity and currency at Motilal Oswal Financial Services Ltd.

The reconstitution of the board of Multi Commodity Exchange of India Ltd (MCX), an affiliate of NSEL, is a “step in right direction”, said Narne.

Jignesh Shah, the founder and vice-chairman of MCX, resigned from the board of the exchange on 31 October. MCX is 26% owned by Financial Technologies (India) Ltd (FTIL), of which Shah is founder chairman and CEO. FTIL also owns 99.99% of NSEL.

The monthly average trading volume in MCX dropped from Rs.51,006 crore in April to Rs.14,809 crore in November. At its smaller rival National Commodity and Derivatives Exchange Ltd, average turnover fell from Rs.4,532 crore to Rs.3,565 crore.

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