Indian exchanges have reported 38 per cent decline in commodity derivatives business since the Covid-19 pandemic started spreading across the country.
Between February and May, the daily average turnover in commodity futures trading slumped by 38%.
India’s largest commodity exchange, the Multi Commodity Exchange of India (MCX), reported its daily average turnover (DAT) at Rs 15,658 crore in April 2020, the lowest since 2013. One reason is that after negative price settlement in crude oil futures in April, many brokers discontinued trading in crude oil while other increased margins.
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And then, of course, the lockdown dented trading sentiment and the closure of factories also reduced hedging requirements for companies, small and medium enterprises (SMEs) in commodities. The DAT at MCX, however, recovered to Rs 23,829 crore in May from Rs 15,658 in April, but still shows a massive decline from its level of Rs 37,727 crore in February and Rs 27,252 crore in May 2019.
NCDEX, which is working on its initial public offerings (IPO), has posted a DAT of Rs 469 crore for May 2020 as against Rs 1,304 crore for the pre-Covid month of February this year and Rs 2,104 crore in the comparable month last year. Closure of agricultural produce market committees (APMCs) in the nationwide lockdown exacerbated the decline. In the absence of a spot market, price discovery of all agricultural commodities was impacted.
“The decline in trading volume and turnover of exchanges in commodity derivatives during this Covid-19 period can be attributed to the nationwide lockdown. But with the lockdown being gradually relaxed now, hedgers will be back in business steadily, and this would increase trading volume,” said Narinder Wadhwa, President, Commodity Participants’ Association of India (CPAI).
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One of the reasons for lower volumes could be the reduction in trading time. Increasing pace of Covid-19 patients prompted both the exchanges and the Securities and Exchange Board of India (Sebi) to cut trading time in April. The original trading time, however, was restored by MCX in the last week of April.
Reliance-anchored Indian Commodity Exchange (ICEX) also reported a sharp fall in daily average turnover to Rs 27 crore from Rs 187 crore in February 2020 and Rs 209 crore in the comparable month in 2019. ICEX is currently under investigation with its top officials being asked to stay home, leaving daily operations at the hands of independent directors. BSE and NSE also saw sharp fall in commodity derivatives.
“Volume picked up in May as Sebi restored futures trading time to its original level of 11.55pm,” said Kishore Narne, Associate Director, Motilal Oswal Financial Services Ltd. “Falling volume in commodities is of grave concern as shallower the markets, they are more vulnerable for price manipulation,” said Narne.
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Traders, meanwhile, demanded that both concern exchanges and the regulator to come out with mechanism to increase volume in shallow commodities to strengthen price discovery mechanism on futures exchanges for which current is the right time being beginning of kharif sowing season.
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