 |
BACKGROUND |
 |
In the short span since commodity ‘futures’ trading was permitted in 2003, the commodity
derivatives market in India has witnessed phenomenal growth. During this period,
volumes traded at various commodity exchanges in India have grown astronomically
from Rs. 660 billion (2003-04) to over Rs. 30000 billion (2006-07). Volumes traded
in 2007-08 are estimated to grow to Rs. 35000 billion. However, the linkages needed
for long term, robust growth of the markets, including wide participation and awareness
of the markets and its functioning, both among policy makers and opinion makers
on the one hand, and at the grass root level, on the other are woefully inadequate.
Other constraining factors include the lack of well spread spot markets, availability
of deep and easily accessible research material, and intelligence on market trends
in respect of various commodities. In particular, as in any other emerging area,
there is little or no research in the commodity derivatives sector, resulting in
poor understanding of the dynamics of the commodity markets.
|
|
|
THE NCDEX RESEARCH INITIATIVE |
|
In the period since NCDEX (National Commodity & Derivatives Exchange Limited) commenced
operations in December 2003, it has established itself at the forefront of innovation
and research in a wide range of areas, including in establishing a knowledge bureau,
initiating spot price polling or dematerialization of commodity balances. NCDEX
has also set up the NCDEX Institute of Commodity Markets and Research (NICR), a
not-for-profit company, dedicated to promoting research and awareness in commodities
markets. The vision is to make NICR the country’s leading organisaton of commodity
markets, recognised nationally as an independent, credible academic and research
institute of eminence.
|
The key objective of NICR is to widen and improve the understanding of commodity
markets and deepen and improve its functioning through:
Engaging in and sponsoring multi disciplinary research
Contributing to the development of policy formulation, analysis, and advocacy
Disseminating information on commodities, products, services, and be recognised
nationally as a clearing house for information and market intelligence in the commodities
and related sectors
Acting as the leading platform for collaboration among scholars, practitioners,
policy makers, academia, industry, trade and farmer organizations/institutions in
this area and
Engaging in education, training, awareness and capacity building activities.
|
|
|
RESEARCH OBJECTIVES
|
|
The key objective of research to be undertaken, facilitated and
sponsored by NICR will be to have an improved understanding of the commodity futures
market in India, in order to widen and deepen participation by all stake holders.
Research will include both fundamental as well as applied and
policy research and NICR policy would respect academic freedom and
autonomy. While narrow and technical topics would not be discouraged, emphasis will
be given to research on the important problems and issues confronting the fledgling
commodity futures market and macro-economic and policy research that contributes
to the improved understanding of the market and an objective assessment of government
policies and interventions.
|
There has been extensive research on commodity futures markets in several countries
across the world. These research findings will be the starting point of research
in India. Reviews of the literature on commodity futures markets indicate that while
there has been extensive research on technical questions, the research has had insufficient
economic content. There is need to survey the literature with special attention
on the working of futures markets in emerging markets such as China, South Africa,
and Malaysia.
|
In India, attention of Policy makers and the media has largely been on inefficiencies
in the working of commodity futures markets, and the dominance of speculative trading.
These are issues which need to be empirically examined. The causative factors, if
distortions or imperfections have crept in, including manipulation and assessment
of the degree of response of the market to new information need investigation, and
research should point to corrective measures. Simultaneously, the impact of the
introduction of commodity futures market on the economy and the functioning of the
spot markets needs to be evaluated.
|
The crucial question that needs to be addressed is how efficiently the commodity
futures market is working – is it leading to genuine price discovery and attracting
genuine market participants? Is there any impact on spot price variability? Is there
any linkage between inflation and commodity trading? Are grass root level participants
able to meaningfully use these prices and to what extent? What areas need to be
strengthened to facilitate such usage? Research needs to address these questions
and diagnose the causative factors behind imperfections and poor performance where
they exist with a view to making systemic improvements. In this context, efficiency
can be judged in relation to futures responding to new information, including from
the financial sector.
|
A key concern in agricultural commodities futures markets is why only a few farmers
hedge; there is need to have research directed at steps to increase farmer participation,
both for price discovery as well direct participation, either as individuals or
through farmer aggregation models. The feasibility of smaller size of contracts
and the role of micro-finance institutions, NGOs, banks and like entities in facilitating
farmer participation needs to be studied. A vibrant agricultural futures market
can positively impact agricultural production and farm incomes; the extent of the
impact needs to be assessed.
|
All commodity markets whether spot and futures, domestic and international are inter-linked.
Research needs to contribute in understanding these linkages and relationships.
|
Another broad area of research attention is the regulatory environment in which
commodity futures markets currently operate, specifically the economics of regulation.
An independent, autonomous and strong regulator is a necessary condition for the
development of the commodity futures market in the country. In this context there
is need to assess the impact of various measures taken by the Forward Markets Commission
on the functioning of the commodity futures market.
|
Along with the streamlining of the regulatory environment, commodity exchanges also
need to ensure that critical operational issues have been adequately addressed,
such as fixing appropriate contract specifications, clearing and settlement, the
technology platform, physical deliveries, streamlining of assaying procedures, margins
and position limits, spot price fixation, risk management, and market surveillance.
|
Participation by both producers and end users in commodity exchanges needs to be
greatly enhanced. Research must support such participation by evaluating risk management
theories and evaluate internationally accepted hedging strategies in the Indian
context. Research must contribute to the evolution of appropriate commodity risk
management and hedging strategies for the farming community, industry and corporate
sector.
|
The broader macro-economic analysis and policy research is equally relevant for
otherwise research activity may tend to get very narrow and technical with little
economic content. There is concern that agricultural markets are imperfect and fragmented.
Much greater research work is required in addressing these concerns and suggesting
reform measures for improving efficiency and transparency. While there has been
considerable research in assessing demand and supply across various commodity groups,
and in analyzing price movements, clearly there is need to enhance research focus
in this area, especially in agricultural commodities. Linked to this is the assessment
of government policies and interventions and their impact on the functioning of
commodity markets. Research also needs to address the entire value chain in agriculture
marketing, especially the risks associated and inefficiencies at each level. The
commodity market is also attracting considerable interest from investors, including
retail investors, and like in developing economies, commodities have emerged as
an investment class. There is, however, little research on the riskiness of such
investments and/or returns to such investment in the Indian context.
|
In summary, the major areas of research will be:
A. Research on commodity futures, that would include:
a. Analysis of empirical data and research findings from international
experience, especially from emerging economies such as China, South Africa and Malaysia,
with a view to undertaking comparative studies of the development of the commodity
futures market in India;
b. Assessment of the efficiency and performance of the commodity
futures market with reference to specific commodity groups, with a view to diagnosing
the causative factors of market imperfections, both in the spot and future markets
and suggesting the corrective measures needed to be taken.
c. Assessment of the participation of the farmer community, especially
the evaluation of alternate aggregation models and evaluation of the impact of agricultural
futures on agricultural production and incomes;
d. Study of the relationship between the spot and futures markets,
including the impact of futures on spot price variability, as well as linkages between
the domestic and international spot and futures markets;
e. Study of the operating and regulatory environment, including
clearing and settlement issues, margins and position limits, and their impact on
the development of the futures market;
B. Macro-economic analysis and policy research, that would include;
a. Research aimed at widening and deepening the commodity markets,
in general, and reforming the agricultural markets, in particular.
b. Analysis of demand, supply, price movements and cyclical patterns
of various agricultural commodities and their impact on the output of commodities;
c. Study of the efficiency of the agricultural market along the
entire value chain.
d. Assessment of Government policies and interventions impacting
the commodity markets, especially agricultural markets.
e. Study the emergence of commodities as an investment class, and
its relevance both for industry for risk management and to the retail investor.
|
|
|
FUNDING AND TECHNICAL SUPPORT |
|
NICR would provide support to research in the above identified areas, which
would include the organisation of research workshops, seminars and conferences,
technical support for problem setting and research methodology and access to data,
and funding support both directly and through facilitation for undertaking research,
which could include travel grants, research assistants, field visits, as well as
sponsorship for research in identified areas.
|