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Commodity trading hits a new high

As stock markets struggle following volatile global cues, impending inflation, the commodity market is rocking and hitting new highs, reports Arun Kumar.
Hindustan Times | By Arun Kumar, New Delhi
UPDATED ON MAR 17, 2008 09:46 PM IST

With stock markets struggling following global cues and under an impending inflationary pressure, the commodity market is rocking and hitting new highs. In the process, it has also fuelled the prices of agro products, thereby fueling inflation.

Why? While global prices of agro products have increased significantly, the futures market helps in aligning domestic prices with international prices, particularly in commodities that are in deficit. The reduction in margin (the upfront payment for futures trade) in the commodity market helped reduce the cost of transaction while increasing volumes. At the same time, share market traders are shifting to commodity market as the margin in the stock market has gone up to 40 per cent.

After December 24, when the margin was brought down to 6-8 per cent from 20 per cent on different agro products such as channa (gram), soya oil and mustard seeds, it was not just the price, but even the volume in the futures segment that increased substantially. On the other hand, in a falling stock market, the bourses have hiked the margin to 40 per cent from the previous level of around 20 per cent, which increased the cost of trade significantly.

In commodities, which are in shortage, traders know that the sellers cannot arrange the delivery and they have to square up the position at the end of the month. As a result, they pull up prices in line with global prices. In commodities such as sugar and pepper, in which India has a surplus, prices have not risen, experts feel.

Sanjay Kaul, director and CEO of NCDEX Institute Commodity Market Research, said: “If the government decides to import commodities that are in shortage and sells them in the market at low prices, the benchmark prices come down such as in wheat. There are certain commodities where government intervention is more intense than others,” he added. The index of agro products on the National commodity and derivatives exchange (NCDEX) has increased by around 20 per cent to 1,822 points on March 15 from 1,504 on January 1. Following the futures market, the spot index has also increased by 17 per cent to 1,757 during the same period. On the other hand, the securities market has fallen by around 25 per cent from January 8. The volume is a function of volatility and price is driven by global prices, said Shrikan Subbarayan, chief business officer of NCDEX.

A senior official of a commodity exchange said: “After the ban on futures in some of the agro products such as wheat and arhar, the prices of these products have not increased despite the fact the global prices have firmed up substantially,” he added.

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