Commodity Market

Commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts. Commodity markets deal in raw materials that are amenable to grading and that can be stored for considerable periods without deterioration. Originally, the commodity markets started off as a way for farmers to sell their goods at a guaranteed price in the future. Because farmers had no way of knowing whether the harvest would turn out good or bad, it provided a way for them to lock in some profits before going to market. The commodity market also provided a way for buyers to get a price they thought was fair. Commodity is an important constituent of the financial market of any country. It is the market where a wide range of products are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market. Commodity trading involves: Spot trading: Spot trading is any transaction where delivery either takes place immediately, or with a minimum lag between the trade and delivery due to technical constraints. Spot trading normally involves visual inspection of the commodity or a sample of the commodity, and is carried out in markets such as wholesale markets. Commodity markets, on the other hand, require the existence of agreed standards so that trades can be made without visual inspection. Forward contracts: A forward contract is an agreement between two parties to exchange at some fixed future date a given quantity of a commodity for a price defined today. The fixed price today is known as the forward price. Early on these forward contracts were used as a way of getting products from producer to the consumer. These typically were only for food and agricultural products. Futures contracts: A futures contract has the same general features as a forward contract but is standardized and transacted through a futures exchange. Although more complex today,
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early forward contracts for example, were used for rice in seventeenth century Japan. Modern forward, or futures agreements, began in Chicago in the 1840s, with the appearance of the railroads. Chicago, being centrally located, emerged as the hub between Midwestern farmers and producers and the east coast consumer population centers. In essence, a futures contract is a standardized forward contract in which the buyer and the seller accept the terms in regards to product, grade, quantity and location and are only free to negotiate the price METAL Aluminium, Copper, Lead, Nickel, Sponge Iron, Steel Long (Bhavnagar), Steel Long (Govindgarh), Steel Flat, Tin, Zinc FIBER Cotton L Staple, Cotton M Staple, Cotton S Staple, Cotton Yarn, Kapas ENERGY Brent Crude Oil, Crude Oil, Furnace Oil, Natural Gas, M. E. Sour Crude Oil SPICES PLANTATIONS PULSES Cardamom, Jeera, Pepper, Red Chilli Arecanut, Cashew Kernel, Coffee (Robusta), Rubber Chana, Masur, Yellow Peas

PETROCHEMICALS HDPE, Polypropylene(PP), PVC OIL & OIL SEEDS Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cotton Seed, Crude Palm Oil, Groundnut Oil, Kapasia Khalli, Mustard Oil, Mustard Seed (Jaipur), Mustard Seed (Sirsa), RBD Palmolein, Refined Soy Oil, Refined Sunflower Oil, Rice Bran DOC, Rice Bran Refined Oil, Sesame Seed, Soymeal, Soy Bean, Soy Seeds OTHERS Guargum, Guar Seed, Gurchaku, Mentha Oil, Potato (Agra), Potato (Tarkeshwar), Sugar M-30, Sugar S-30
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Objectives of Commodity Futures

Hedging with the objective of transferring risk related to the possession of physical assets through any adverse moments in price. Liquidity and Price discovery to ensure base minimum volume in trading of a commodity through market information and demand supply factors that facilitates a regular and authentic price discovery mechanism. Maintaining buffer stock and better allocation of resources as it augments reduction in inventory requirement and thus the exposure to risks related with price fluctuation declines. Resources can thus be diversified for investments. Price stabilization along with balancing demand and supply position. Futures trading leads to predictability in assessing the domestic prices, which maintains stability, thus safeguarding against any short term adverse price movements. Liquidity in Contracts of the commodities traded also ensures in maintaining the equilibrium between demand and supply. Flexibility, certainty and transparency in purchasing commodities facilitate bank financing. Predictability in prices of commodity would lead to stability, which in turn would eliminate the risks associated with running the business of trading commodities. This would make funding easier and less stringent for banks to commodity market players.

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Commodity Market in India

India, a commodity based economy where two-third of the one billion population depends on agricultural commodities, surprisingly has an under developed commodity market. The vast geographical extent of India and her huge population is aptly complemented. The broadest classification of the Indian Market can be made in terms of the commodity market and the bond market. India Commodity Market can be subdivided into the following two categories: Wholesale Market Retail Market The traditional wholesale market in India dealt with whole sellers who bought goods from the farmers and manufacturers and then sold them to the retailers after making a profit in the process. It was the retailers who finally sold the goods to the consumers. With the passage of time the importance of whole sellers began to decline due to various reasons. In recent years, the extent of the retail market (both organized and unorganized) has evolved in leaps and bounds. In fact, the success stories of the commodity market of India in recent years has mainly centered on the growth generated by the Retail Sector. Almost every commodity under the sun both agricultural and industrial is now being provided at well distributed retail outlets throughout the country. Moreover, the retail outlets belong to both the organized as well as the unorganized sector. The unorganized retail outlets of the yesteryears consist of small shop owners who are price takers where consumers face a highly competitive price structure. The organized sectors on the other hand are owned by various business houses like Pantaloons, Reliance, Tata and others. Such markets are usually selling a wide range of articles agricultural and manufactured, edible and inedible, perishable and durable. Modern marketing strategies and other techniques of sales promotion enable such markets to draw customers from every section of the society. However the growth of such markets has still centered on the urban areas primarily due to infrastructural limitations. Considering the present growth rate, the total valuation of the Indian Retail
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Market is estimated to cross Rs. 10,000 billion in the year 2010. Demand for commodities is likely to become four times by 2012 than what it presently is.

Different Segments of Commodity Market

There are two major segments of the commodities market. They are Over-the-counter (OTC) market:Over-the-counter means that there is no formal structure of trading and parties trade on the basis of bilateral understanding. In terms of commodity trading, OTC represents spot trading of commodities. Since the structure is not formal, it is also referred as customized market". Almost all the trading that takes place over in these markets is delivery based. It is entirely unregulated with respect to disclosure of information between the parties; therefore, the trades that take place are subject to counter-party risk. Like an ordinary contract each counter-party relies on the other side to fulfill their obligation. OTC Contract: - OTC contract is a mutual contract between two parties in which they agree on how a particular trade or agreement will be settled in future. To put it in simple words, which location will the settlement takes place, the specific date in future when the contract will be honored and the pre-arranged price for fulfilling the contract. Forwards and swaps are examples of such contracts. Exchange-traded market:Exchange-traded market also known as derivatives market is the place where commodities are traded over the exchange. It is standardized in nature and decently regulated. An exchange acts as an intermediary to all commodity transactions, and takes initial margin from both sides of the trade to act as a guarantee. All the commodity exchanges are overseen by Forward Market Commission.

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Major Traders in Commodity Markets

HEDGERS A Hedger can be Farmers, manufacturers, importers and exporter. A hedger buys or sells in the futures market to secure the future price of a commodity intended to be sold at a later date in the cash market. This helps protect against price risks. The holders of the long position in futures contracts (buyers of the commodity), are trying to secure as low a price as possible. The short holders of the contract (sellers of the commodity) will want to secure as high a price as possible. The commodity contract, however, provides a definite price certainty for both parties, which reduces the risks associated with price volatility. By means of futures contracts, Hedging can also be used as a means to lock in an acceptable price margin between the cost of the raw material and the retail cost of the final product sold. Speculator Other commodity market participants, however, do not aim to minimize risk but rather to benefit from the inherently risky nature of the commodity market. These are the speculators, and they aim to profit from the very price change that hedgers are protecting themselves against. A hedger would want to minimize their risk no matter what they're investing in, while speculators want to increase their risk and therefore maximize their profits. In the commodity market, a speculator buying a contract low in order to sell high in the future would most likely be buying that contract from a hedger selling a contract low in anticipation of declining prices in the future. Unlike the hedger, the speculator does not actually seek to own the commodity in question. Rather, he or she will enter the market seeking profits by offsetting rising and declining prices through the buying and selling of contracts. In a fast-paced market into which information is continuously being fed, speculators and hedgers bounce off of--and benefit from--each other. The closer it gets to the time of the contract's expiration, the more solid the information entering the market will be regarding the commodity in question. Thus, all can expect a more accurate reflection of supply and demand and the corresponding price.

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LONG

SHORT

HEDGER

Secure a price now to protect against future rising prices

Secure a price now to protect against future declining prices

SPECULATOR

Secure a price now in anticipation of rising prices

Secure a price now in anticipation of declining prices

Arbitrage Arbitrage refers to the opportunity of taking advantage between the price difference between 2 different markets for that same stock or commodity. In simple terms one can understand by an example of a commodity selling in one market at price x and the same commodity selling in another market at price x + y. Now this y, is the difference between the two markets is the arbitrage available to the trader. The trade is carried simultaneously at both the markets so theoretically there is no risk. (This arbitrage should not be confused with the word arbitration, as arbitration is referred to solving of dispute between two or more parties.) The person who conducts and takes advantage of arbitrage in stocks, commodities, interest rate bonds, derivative products, foreign exchange is known as an arbitrageur. An arbitrage opportunity exists between different markets be-cause there are different kind of players in the market, some might be speculators, others jobbers, some market-markets, and some might be arbitrageurs. In India there are a good amount of Arbitrage opportunities between NCDEX, MCX in commodities.
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Risk Associated With Commodities Markets

No risk can be eliminated, but the same can be transferred to some-one who can handle it better or to someone who has the appetite for risk. Commodity enterprises primarily face the following classes of risk. The price risk:The chance there will be unexpected changes in a financial price, including currency (foreign exchange) risk, interest rate risk, and commodity price risk. Basically, it's the risk you will lose money due to a fall in the market price of a security that you own. The quantity risk:Occurs when the quantity of an asset to be hedged is uncertain. The risk that an insufficient amount of an investment will be hedged and will result in a loss of the unhedged portion. The yield/output risk:The risk of experiencing an adverse shift in market interest rates associated with investing in a fixed income instrument. The risk is associated with either a flattening or steepening of the yield curve, which is a result of changing yields among comparable bonds with different maturities. When market yields change, this will impact the price of a fixed-income instrument. When market interest rates, or yields, increase, the price of a bond will decrease and vice versa. The political Risk:It is a type of risk that can be understood and managed with reasoned foresight and investment. Broadly, political risk refers to any political change that alters the expected outcome and value of a given economic action by changing the probability of achieving business objectives. Talking about the nationwide commodity exchanges, the risk of the counter party not fulfilling his obligations on due date or at any time therefore is the most common risk.

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Commodity Derivatives Market

Derivative Market can broadly be classified as commodity derivative market and financial derivative market. As the name suggest, commodity derivatives trade contracts for which the underlying assets is a commodity like, wheat, soya bean ,cotton etc. or precious metal like Gold and Silver. Financial derivatives markets trade contract that have a financial assets or variable as the underlying. The most financial derivatives are those, which have equity, interest rate and ex-change rate as the underlying. Financial derivatives are used to hedge the expo-sure to market risk. The commodity derivatives differ from the financial derivatives mainly in the following two aspects: Firstly, due to the bulky nature of the Underlying assets, physical settlement in commodity derivatives creates the need for warehousing. Secondly, in the case of commodities, the quality of the asset underlying a contract can vary largely. Commodity Future Contract:A future contract is an agreement for buying or selling a commodity for a predetermined delivery price at as specific future time. Futures are standardized contract that are traded on organized facture exchanges that ensure performance of the contract and remove the default risk. For example suppose a farmer is expecting the crop of paddy to be ready in two months time, but is worried that the price of paddy may decline in this period. In order to minimize his risk. He can enter into a future contract to sell his crop in two months time at a price determined now Commodity Option Contract:Like futures, options are also financial instruments used for hedging and speculation. The commodity option holder has the right, but not the obligation to buy (or sell) a specified quantity of a commodity at specified price on or before a specified date. Option contract involve two parties the seller of the option writes the option in favor of the buyer (holder) who pays a certain premium to the seller as a price for the option. There are two types of commodity options. A call option gives the holder a right to buy a commodity at an agreed price, while a put option gives the holder a right to sell a commodity at an agreed price on or before a specified date which is called expiry date.

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The option holder will exercise the option only if it is beneficial to him, otherwise he will let the option lapse.

Significance and Importance of Investment

Why to invest in commodity market? Commodity futures are globally recognized to be a part of every successful and diversified investment portfolio. The fact that the returns from most of the commodities in the last 53 years from 1951 to 2006 have been higher than the global inflation rate, establishes that investments in commodity are an effective hedge against inflation. Some of the reasons that make investing in commodity future an attractive preposition are described below: Leverage: Commodity Futures trading is done on margins. The investor only deposits a fraction of the value of the futures contract with the broker to cover the exchange specified margin requirements. This gives the investor greater leverage and thus the ability to generate higher returns. Liquidity: Unlike investment vehicles like real estate, investments in commodity futures offer high liquidity. It is equally easy to both buy and sell futures and an investor can easily liquidate his position whenever required. There is also another advantage of being able to use the profits from a trade elsewhere, without having to close the position. Diversification: Investments in commodity markets are an excellent means of portfolio diversification. For example, gold prices have historically shown a low correlation with most other asset prices (such as equities) and thus offer an excellent means for portfolio diversification. Inflation Hedge:

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As the commodity prices determine price levels and consequently inflation, investing in commodity futures can act as a hedge against inflation.

Commodity Exchange
Commodity exchange for buying and selling commodities for future delivery. Originally, a commodity exchange is a market organized to allow for the selling and buying of commodities. Commodities, which are hard goods, as opposed to services, may be bought and sold on a commodity exchange in three types of markets: Cash, Futures and Options A commodity exchange is considered to be essentially public because anybody may trade through its member firms. The commodity exchange itself regulates the trading practices of its members while prices on a commodity exchange are determined by supply and demand. A commodity exchange provides the rules, procedures, and physical for commodity trading, oversees trading practices, and gathers and disseminates marketplace information. Commodity exchange transactions take place on the commodity exchange floor, in what is called a pit, and must be affected within certain time limits. Floor traders, floor brokers and futures commissions merchants working on the floor of a commodity exchange must be registered by the SEC. Role of COMMODITY EXCHANGE Commodity exchanges provide platforms to suit the varied requirements of customers. Firstly, these exchanges enable actual users (farmers, agro processors, industry where the predominant cost is commodity input/output cost) to hedge their price risk given the uncertainty of the future - especially in agriculture where there is uncertainty regarding the monsoon and hence prices. This holds good also for nonagro products like metals or energy products as well where global forces could exert considerable influence. Purchasers are also assured of a fixed price which is
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determined in advance, thereby avoiding surprises to them. It must be borne in mind that commodity prices in India have always been woven firmly into the international fabric. Today, price fluctuations in all major commodities in the country mirror both national and international factors and not merely national factors. Secondly, by involving the group of investors and speculators, commodity exchanges provide liquidity and buoyancy to the system. Lastly, the arbitrageurs play an important role in balancing the market as arbitrage conditions, where they exist, are ironed out as arbitrageurs trade with opposite positions on different platforms and hence generate opposing demand and supply forces which ultimately narrows down the gaps in prices. It must be pointed out that while the monsoon conditions affect the prices of agro-based commodities, the phenomenon of globalization has made prices of other products such as metals, energy products, etc., vulnerable to changes in global politics, policies, growth paradigms, etc. This would be strengthened as the world moves closer to the resolution of the WTO impasses, which would become a reality shortly. Commodity exchanges are institutions which provide a platform for trading in commodity futures just as how stock markets provide space for trading in equities and their derivatives. In Short, Commodity exchanges are institutions which provide a platform for trading in commodity futures just as how stock markets provide space for trading in equities and their derivatives.

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Structure of Commodity Exchange India

The government has now allowed national commodity exchanges, similar to the BSE & NSE, to come up and let them deal in commodity derivatives in an electronic trading environment. In India there are 21 regional exchanges and three national level multicommodity exchanges. These exchanges are expected to offer a nation-wide anonymous, order driven, screen based trading system for trading. The Forward Markets Commission (FMC) will regulate these exchanges.

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Regulatory authority for commodity Market

Forward Markets Commission (FMC) The Forward Markets Commission (FMC) headquartered at Mumbai, is the regulatory authority for commodity derivatives in India. It is a statutory body set up in1953 under the Forward Contracts (Regulation) Act, 1952. FMC is in turn supervised by the Ministry of Consumer Affairs, Food and Public Distribution, Govt. of India. The act provides that the commission shall consist of not less than two but not exceeding four members appointed by the Central Govt. out of them being nominated by the Central Govt. be the chairman thereof. The functions of the Forward Markets Commission are as follows: To advise the Central Government in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the Forward Contracts (Regulations) Act 1952; To keep forward markets under observation and to take such action in relation to them, as it may consider necessary, in exercise of the powers as-signed to it by or under the Act; To collect and whenever the Commission thinks it necessary , to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding supply, demand and prices, and to submit to the Central Government, periodical reports on the working of forward markets relating to such goods; To make recommendations generally with a view to improving the organization and working of forward markets; To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary;

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Regulatory Measures Evolved By FMC Limit on open position of an individual operator to prevent over-trading; Limit on price fluctuation to prevent abrupt upswing or downswing in prices; Special Margin deposits to be collected on outstanding purchases or sales to curb excessive speculators activity through financial restraints; Minimum / Maximum prices to be prescribed to prevent futures prices from falling below the levels that are not remunerative and from rising be-low the levels not warranted by genuine supply and demand factors; During shortages, extreme steps like skipping trading in certain deliveries of the contracts, closing the markets for a specified period and even closing out the contracts to overcome the emergency situations are taken;

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How Commodity Market Works

There are two kinds of trades in commodities. The first is the spot trade, in which one pays cash and carries away the goods. The second is futures trade. The under pinning for futures is the warehouse receipt. A person deposits certain amount of say, good X in a ware house and gets a warehouse receipt which allows him to ask for physical delivery of the good from the warehouse but someone trading in commodity futures need not necessarily possess such a receipt to strike a deal. A person can buy or sale a commodity future on an exchange based on his expectation of where the price will go. Futures have something called an expiry date, by when the buyer or seller either closes (square off) his account or give/take delivery of the commodity. The broker maintains an account of all dealing parties in which the daily profit or loss due to changes in the futures price is recorded. Squiring off is done by taking an opposite contract so that the
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net out-standing is nil. For commodity futures to work, the seller should be able to deposit the commodity at warehouse nearest to him and collect the warehouse receipt. The buyer should be able to take physical delivery at a location of his choice on presenting the warehouse receipt. But at present in India very few warehouses provide delivery for specific commodities. Today Commodity trading system is fully computerized. Traders need not visit a commodity market to speculate. With online commodity trading they could sit in the confines of their home or office and call the shots.

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How commodity trading works for retail investor When you buy a Gold Futures contract, you undertake to do three things. 1. Buy the amount of gold specified in the contract. 2. Buy it at the price specified in the contract. 3. Buy it on the expiry of the contract. This could be after one month, two months, and three months and so on. Of course, if you sell the Gold Futures contract before it expires, then you don't have to worry about actually buying the gold. Let's say you buy the Gold Future contract at say Rs 7,200 per 10 gm. Your hunch comes true and the gold prices rally to Rs 8,000 per 10 gm. You can sell the Gold Futures any time before expiry of the contract. Gold and other commodity futures prices are quoted on the commodity exchanges in exactly the same way in which stock prices or stock futures prices are quoted on a daily basis in the stock markets. Just like stock futures (Read How to trade in Futures to understand how futures work). When you buy a Futures, you don't have to pay the entire amount, just a fixed percentage of the cost. This is known as the margin. Let's say you are buying a Gold Futures contract. The minimum contract size for a gold future is 100 gms. 100 gms of gold may be worth Rs 72,000. The margin for gold set by MCX is 3.5%. So you only end up paying Rs 2,520. The low margin means that you can buy futures representing a large amount of gold by paying only a fraction of the price. So you bought the Gold Futures contract when it was Rs 72,000 per 100 gms. The next day, the price of gold rose to Rs 73,000 per 100 gms. Rs 1,000 (Rs 73,000 Rs 72,000) will be credited to your account. The following day, the price dips to Rs 72,500. Rs 500 will get debited from your account (Rs 73,000 - Rs 72,500). Compared to stocks, trading in commodities is much cheaper, because margins are much lower than in stock futures. Brokerage is low for commodity futures. It ranges from 0.05% to 0.12%.Because of this, commodity futures are a speculator's paradise. The advantages in this line is that there are no balance sheets, no complicated financial statements----all you have to do is follow the supply and demand position of the commodities you trade in very closely.

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Benefits of Investing in Commodity Market

Materials offer a good protection for investors against inflation and economic uncertainty. Gold is generally considered the ultimate safe haven in times of crisis. Strings the gold price in 2010 is still the one record to another. Protection against inflation When the economy is less, governments often have additional print money to stimulate the economy. Money is worth less and inflation occurs. If more money is reprinted, the amount of money invested in commodities is getting bigger. Demand for commodities is therefore greater so the price of raw materials will enter the height. Part of a diversified investment portfolio Commodities are often viewed as an essential component of a diversified investment portfolio. If you have stocks and bonds in your investment portfolio are recorded, it is advantageous to simultaneously possess raw materials. If the stock market crash, then you have not put all eggs in one basket. Often, the values of commodities such as gold and silver as the shares on the stock market go down. Economic growth of emerging countries The economic growth of emerging countries such as China, India and Brazil, demand for raw materials increased significantly. Growing economies have so many raw materials needed to make products and to boost the pace of the industry by up to date. The stronger the economy grows, the greater the demand for commodities. The greater demand, higher prices are likely to evolve. BENEFITS TO INDUSTRY FROM FUTURES TRADING Hedging the price risk associated with futures contractual commitments. Spaced out purchases possible rather than large cash purchases and its storage. Efficient price discovery prevents seasonal price volatility. Greater flexibility, certainty and transparency in procuring commodities would aid bank lending. Facilitate informed lending.

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 Hedged positions of producers and processors would reduce the risk of default faced by banks. * Lending for agricultural sector would go up with greater transparency in pricing and storage. Commodity Exchanges to act as distribution network to retail agro-finance from Banks to rural households. Provide trading limit finance to Traders in commodities Exchanges. BENEFITS TO EXCHANGE MEMBER Access to a huge potential market much greater than the securities and cash market in commodities. Robust, scalable, state-of-art technology deployment. Member can trade in multiple commodities from a single point, on real time basis.

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Comparisons with Equity Market

Factors Commodity Market Equity Market

Percentage Returns

Gold gives 10-15 %returns on the conservative Basis.

Returns in the range of 15-20 % on annual basis.

Initial Margins

Lower in the range of 4-5-6%.

Higher in the range of 2540%.

Price Movements

Price movements are purely based on the supply and demand.

Prices movements based on the expectation of future performance.

Future Predictability

Predictability of future prices is not in the control due to factors like Failure of Monsoon and Formation of Elninos at Pacific.

Predictability of future performance is reasonably high, which is supplemented by the History of management performance.

Volatility

Lower Volatility.

Higher Volatility.

Arbitrage Opportunities

Exists on 1-2 month contracts. There is a small difference in prices but in case of commodities, which it is in large tonnage makes a huge differences.

Significant Arbitrage Opportunities exists.

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Analysis
Commodities is an asset class which is cyclical and tradable by nature. In the western world, the volumes of the commodities market are almost two to three times as compared to the equity market. Commodities is a volume game, you rarely see prices shooting up by 20%-30% in a single day, which is common in the equity markets. So, to make huge profits, one should have a high leverage to make the most of the 3%-4% movements which take place throughout the day. Apart from other reasons that were witnessed around the globe post the 2008 recession, we have seen easy monetary policies being adopted by western central bankers and beyond that any slowdown or fear of a slowdown was tackled by stimulus packages. A massive debasement of currencies is taking place since the past three years and that is one of the prime reasons investors have found refuge in hard assets and commodities. It is not just shortages that are fuelling the Bull Run in commodities. The introduction of exchange traded funds internationally in commodities, pension funds, sovereign funds as well as central bankers (in case of gold), who are increasing the exposure in commodities, are responsible in a very significant way for the spike that we have seen in commodity volumes. Slowing growth in developed nations and high inflationary expectations in emerging markets have also benefited commodities. Investors have found a store of value in commodities. The intrinsic value of commodities in comparison with other asset classes is very high. There is a secular bull run in the complex since the past decade. When we combine the volumes of all futures exchanges and spot exchanges, we find that the Indian commodities market is gearing itself for the next phase of growth. Further, the amendment in several Acts will augment growth and prepare it for the big leap. We believe that in the coming two years, the cumulative volume on the Indian commodities exchanges would be somewhere between 1, 10,000 and 1, 30,000 crore per day. Retail traders and investors should take advantage by being a part of this story. They should diversify at least 15% to 20% of their total portfolio in commodities.

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Conclusion
After almost two years that commodity trading is finding favor with Indian investors and is been seen as a separate asset class with good growth opportunities. For diversification of portfolio beyond shares, fixed deposits and mutual funds, commodity trading offers a good option for long-term investors and arbitrageurs and speculators. And, now, with daily global volumes in commodity trading touching three times that of equities, trading in commodities cannot be ignored by Indian investors. Online commodity exchanges need to revamp certain laws governing futures in commodities to make the markets more attractive. The national multi-commodity exchanges have unitedly proposed to the government that in view of the growth of the commodities market, foreign institutional investors should be given the go-ahead to invest in commodity futures in India. Their entry will deepen and broad base the commodity futures market. As a matter of fact, derivative instruments, such as futures, can help India become a global trading hub for select commodities. Commodity trading in India is poised for a big take-off in India on the back of factors like global economic recovery and increasing demand from China for commodities. Considering the huge volatility witnessed in the equity markets recently with the Sensex touching 21000 level commodities could add the required zing to investors' portfolio. Therefore, it won't be long before the market sees the emergence of a completely redefined set of retail investors.

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