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Commodity Derivatives Market in India- An Overview*
Background Futures trading play a key role in the marketing of many important agricultural and non-agricultural commodities. The first derivative in the world started with the commodities. No one is absolutely certain when the forward markets began although some economic historians feel that the practice was in vogue in Europe as early as in the twelfth century. But the effective origin of futures trading could really be traced only from the 16th century. Organised futures trading started in 1865 at the Board of Trade of Chicago, followed by other US trading centres such as Kansas, Minneapolis and New York. The history of futures trading in commodities in India started in the later part of 19th century, when the first commodity exchange, viz., the Bombay Cotton Trade Association Ltd was set up for organizing futures trading in cotton followed by derivatives trading in oilseeds in Bombay (1900), raw jute and jute goods in Kolkata (1912), wheat in Hapur (1913) and bullion in Bombay (1920). Recent Evolution The early 20th century saw the emergence of a number of commodity Exchanges. Earlier, there were no uniform guidelines or regulations in the commodities futures market. In order to provide constant vigil to prevent crisis, rather than combat these after they occurred, a comprehensive legislation was enacted by the then Bombay State in 1947 in the form of the Bombay Forward Contracts Control Act. On adoption of the Constitution of the Indian Republic, the subject, “Stock Exchanges and Futures Markets” was included in the Union list. Accordingly, a central legislation called Forward Contracts (Regulation) Act, 1952 was enacted which provided the legal framework for organizing forward trading in the country and inter alia, for recognition of exchanges. One of the important features of this Act is to notify a commodity for prohibition or regulation of forward contracts. Under these provisions, a large number of commodities were notified for prohibition during the 1960s which left only a handful of insignificant commodities open for forward trade. As a result, the derivatives market in commodities remained dormant for a long time. After a long gap, in 2003, futures trading in commodities were allowed in India, with the group of 54 prohibited commodities, being opened up for forward trading, along with establishment and recognition of three new national exchanges with on-line trading and professional management. The central government issued a notification on 1 April 2003 permitting futures trading in the commodities which facilitated the setting up of 3 national level multi-commodities exchanges. Namely, Ø National Commodity Exchange of India, (NCDEX) Mumbai. (December 2003) Ø Multi Commodity Exchange of India Ltd, (MCX) Mumbai. (October 2003) Ø National Multi Commodity Exchange of India Ltd, (NMCE) Ahmadabad (Incorporated in 26 November 2002) The prohibition on forward trading was completely withdrawn, even in sensitive commodities such as wheat, rice, sugar and pulses. The new exchanges brought capital, technology and innovation to the market. Futures contracts are now available for major agricultural commodities as well as metals and energy. A number of commodities have been made available for trading on these exchanges including precious metals, non-precious metals, and agricultural commodities including agricultural products. Motive behind the Inception At the time of commencement of the commodity futures exchanges, it was anticipated that in India they would provide the country’s industrial and farming communities with a transparent price discovery platform while enabling them to hedge against price risk and price volatility. The major function of futures markets is to transfer price risk from hedgers to speculators. Six years later, daily volumes on local commexes are just a one-third of those on the country’s stock markets. One of the justifications for opening up and rejuvenating commodities futures markets in India during the beginning of the current millennium has been to create infrastructure which will help farmers to access the market as well-informed players. Price discovery and price risk mitigation are the main objectives of commodity futures markets, which enable the farmers to take rational decisions about cropping and marketing of their produce to increase their farm income. This creates incentives and resources for investment in agricultural operations to improve productivity. Farmers can derive benefit from futures markets as follows: v By participating directly/indirectly in the market to hedge their price risks. v To take benefit of prices discovered on the platform of commodity exchanges by taking rational and well informed cropping /marketing decisions. Futures prices discovered on the platform of exchanges can provide an important input to all decision makers. A futures price indicates technically the price expectations at future dates. These prices, if efficiently determined, disseminated and accessible to all concerned - can pave the way for optimal decision making and resource allocations. The National Agricultural Policy, 2000, expressed support for commodity futures as the Expert Committee on Strengthening and Developing Agricultural Marketing emphasized the need for and role of futures trading in price-risk management and in marketing of agricultural produce. This Committee’s Group on Forward and Futures Markets recommended that it should be left to interested exchanges to decide in the appropriateness/usefulness of commencing futures trading in products (not necessarily of just commodities) based on concrete studies of feasibility on a case-to-case basis. The introduction of futures trading with the ability to buy and sell commodities for future delivery helps to make the price less volatile and realistic in comparison to the cash market prices. It, however, noted that all the commodities are not suited for futures trading. For a commodity to be suitable for futures trading, it must possess the following characteristics:- · The commodity should have a suitable demand and supply conditions, i.e., volume and marketable surplus should be large. · Prices should be volatile to necessitate hedging through futures trading in such a case persons with spot market commitment face a price risk and hence there would be demand for hedging facilities. · The commodity should be free from substantial control from government regulations (or other bodies) imposing restrictions on supply, distribution and price of the commodity. · The commodity should be homogenous or alternately it must be possible to specify a standard grade and to measure deviations from that grade; this condition is necessary for the futures exchange to deal in standardized contracts. · The commodity should be storable. In the absence of this condition, arbitrage would not be possible and there would be no relationship between spot and futures markets.
Types of Contracts There are two major types of commodity derivatives contracts: Commodity Futures Contracts: A futures contract is an agreement for buying or selling a commodity for a predetermined delivery price at a specific future time. This is typically used for food and agriculture products like wheat or frozen orange juice. Futures are standardized contracts that are traded at organized futures exchanges that ensure performance of the contracts and thus remove the default risk. The commodity futures have existed since the Chicago Board of Trade was established in 1848 to bring farmers and merchants together. Commodity Options contracts: 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 specific quantity of a commodity at a specified price on or before a specified date. Option contracts involve two parties – the seller of the option writes the option in favour of the buyer (holder) who pays a certain premium to the seller as a price for the option. Futures and options trading therefore helps in hedging the price risk and also provide investment opportunity to speculators who are willing to assume risk for a possible return. Thus futures and options markets perform important functions that cannot be ignored in modern business environment. At the same time, it is true that too much speculative activity in essential commodities would destabilize the markets and therefore, these markets are normally regulated as per the laws of the country. Trading in commodity options contracts has been banned since 1952 and is likely to be introduced in India in the near future. As the commodity exchanges are more volatile than stock exchanges, the need of introducing options gain more emphasis in our country. An efficient and well organised commodities future market is generally expected to be helpful in price discovery for traded commodities. Apart from regulating the commodity markets, the growth of the market helps the producers and traders with the opportunity to benefit from price discovery and price-risk management. Turnover The country as of now has 22 commodity bourses, of which three operate at the national level, while three proposed bourses are on the cards. Since the trading in commodity futures have begun in 2003, bulk of trading is witnessed in only three national exchanges: MCX, NCDEX and NMCE. Earlier, NCDEX was the leader in the total turnover, but later MCX has taken this position and continues to rule the markets. The total turnover on commodities exchanges began with a total notional value of trading at Rs 1,29,364 crore in 2002-03 and it rapidly jumped to 46,44,494 crore in 2006-07, but following the ban on a few commodities in January 2007 and then in May 2008 as well as imposition of higher margins and stringent norms for trading, the growth in trading has somewhat been restrained to Rs 40,65,989 crore in 2007-08. But, there has been a sharp jump in the turnover notwithstanding the ban on few commodities in 2008-09 and the commodity markets bounced back and recorded massive expansion to Rs 52,48,957 crore (Table 1). As percentage of gross domestic product (GDP) at market prices, the total trading accounted for 89% in 2006-07, which has only marginally slipped to 86% in 2007-08, but again increased to 99% in 2008-09. There has been a very significant decline in volume of futures trade in agriculture commodities during the year 2007-08, by 28.5% and the trend continued in 2008-09. The overwhelming part of this decline is accounted for by Chana, Maize, Mentha Oil, Guar seed, Potato, Guar Gum, Chillies and Cardamom. Trade in these eight commodities, which accounted for 57.9% of total futures trade in agricultural commodities in 2006-07, declined by over 66.4% during 2007-08 compared to previous year. The decline in these eight commodities exceeded the decline of futures trading volumes in all agricultural commodities taken together.
At present, India has become one of the fastest-growing commodity futures markets with a combined trade turnover of around 50 trillion rupees or worth $110 billion. This expansion is attributed to the introduction of new products like, certified emission reduction (CER), aviation turbine fuel (ATF) etc, launched for futures trading in the commodity exchanges. According to Mr.B.C. Katua, Chairman, Forward Markets Commission (FMC), the commodity futures turnover is expected to cross Rs 60 lakh crore in the financial year 2009-10 and Rs100 lakh crore by 2010-11 if the Forward Contracts Regulation Act (FCRA) amendment bill gets passed. However, the major part of the trading has remained with the precious metals and energy futures. It appears that the futures market seems to relegate its stated objective of assisting the farmers and has remained concentrated in some of the globally traded commodities. With such a sharp and rapid increase in the turnover as cited above, the domestic commodity futures market has begun to be recognized among the top derivatives exchanges of the world. As per the Futures Industry Association (FIA), the MCX ranked 10th among the top commodity exchanges worldwide in 2007, while it ranked third in gold trading followed by NYMEX and TOCOM. The largest commodity market in the world is the Chicago Board of Trade where contracts are traded through open outcry and e-trading. Commodity-wise Turnover In the financial year 2008-09, the share of precious metals in futures trading has increased significantly followed by crude oil in which the trading was increased dramatically due to sharp rise in the prices. Similarly, performance of base metals was also sizeable, except zinc, compare to 2007-08 (Table 2).
But, in respect
of the agri-commodities traded in the bourses, the total share of these
commodities was nearly halved during 2008-09, following the continued ban
on several commodities. Futures trade in wheat, rice, tur and urad were
banned in March 2007 following the pressure from many political parties,
who blamed the futures market for a spike in retail prices of food
commodities. Similarly, agricultural commodities had another shock on 7
May 2008, when FMC banned other four agri commodities namely chana, soy
oil, potato and rubber for four months till 6 September citing the same
reason. Rice, tur and urad are those commodities that are still under ban.
Recently, sugar was also banned on 27 May 2009 following the steep rise in
the commodity price. Spot and Future Prices In the past few years there has been an incessant rise in the commodity prices of most of the commodities. Prices of gold, crude oil, and copper for instance, touched their all-time highs in 2008-09. The value of gold has risen significantly both in spot and futures market in the past four years it has been around 70% from Rs 9,520 in April 2006 to Rs 14,558 for 10 gms in June 2009. Nickel prices ruled higher in the years 2007 and 2008 following huge demand for the commodity in domestic and international markets. The spot and future prices of turmeric, pepper and soybean have sharply increased over the period, while those of jeera have shown a downward trend. Pepper prices reached their all-time high in March 2008 following the tight supply position in the domestic market, but now they are ruling steady in the commodity exchanges (Table 3).
Recent Developments India is one of the top producers of a large number of agricultural commodities, and also has a long history of trading in commodities and related derivatives. The commodities derivatives market has seen ups and downs, but seems to have finally come of age. The market has made enormous progress in terms of technology, transparency and the trading activity. Interestingly, this has happened only after the Government protection was removed from a number of commodities, and market forces were allowed to play their role. This should act as a major lesson for the policy makers in developing countries, that pricing and price risk management should better be left to the market forces rather than trying to achieve these through administered price mechanisms. The management of price risk is going to assume even greater importance in the future, with the promotion of free trade and removal of trade barriers in the world. All this augurs well for the commodity derivatives markets. To make up for the loss of growth and development during the four decades of restrictive government policies, FMC and the government have encouraged setting up of the commodity exchanges using the most modern systems and practices in the world. Some of the main regulatory measures imposed by the FMC include daily mark to market system of margins, creation of trade guarantee fund, back-office computerization for the existing single commodity exchanges, online trading for the new exchanges, demutualization for the new exchanges, and one-third representation of independent Directors on the Boards of existing exchanges. Driven by the new wave of usage of state of art technology for the trading and settlement system, they have used the time-tested mechanism of electronic trading platform for anonymous automatic order matching system, which is transparent and efficient. Recently, three applications were considered by the FMC to set up exchanges at the national levels of which two have received approvals from the regulator. Commodity Transaction Tax (CTT)
In the union
budget 2008-09, the government had proposed a CTT of 0.017% with the
purpose to contain price rise and volatility, to generate revenue and to
increase transparency. But it was never levied in India, as the commodity
exchanges have been opposing the introduction of CTT because it was
anticipated that it will increase the total transaction cost of futures
trading in commodity markets. But, this lingering uncertainty has been put
to an end in the Union Budget 2009-10, when the CTT was scrapped from the
Finance Act of 2009. The Planning Commission as well as the FMC has
favoured removal of the Commodity Transaction Tax (CTT). Unresolved issues The Warehousing and Standardization For commodity derivatives market to work efficiently, it is necessary to have a sophisticated, cost-effective, reliable and convenient warehousing system in the country. Further, independent labs or quality testing centres should be set up in each region to certify the quality, grade and quantity of commodities so that they are appropriately standardized and there are no shocks waiting for the ultimate buyer who takes the physical delivery. Warehouses also need to be conveniently located.
The Regulatory Structure of Indian Commodity Derivatives Markets
As the market activity picks up and the volumes rise, the market is in the need of a strong and independent regulator, similar to the Securities and Exchange Board of India (SEBI) that regulates the securities markets. Unlike SEBI which is an independent body, the FMC is under the Department of Consumer Affairs (Ministry of Consumer Affairs, Food and Public Distribution) and depends on it for funds. It is imperative that the Government should grant more powers to the FMC to ensure an orderly development of the commodity derivatives markets. Recently in the Economic Survey it was proposed that all financial markets should be regulated by a single regulator. Though commodity derivatives do not belong to the category of financial derivatives, it was implied that commodity derivatives markets will also be regulated by SEBI. But, FMC claims that it would be dangerous if both the markets are regulated by one regulator. However, because of inter-relationship between the two markets, the SEBI and FMC may need to work closely with each other. Lack of Economy of Scale There are too many (3 national level and 19 regional) commodity exchanges in India, under which around 145 commodities are allowed for derivatives trading; in practice, derivatives are popular for only a few commodities on a few exchanges. All this splits volumes and makes some exchanges unviable. This problem can possibly be addressed by consolidating some exchanges. Also, the question of convergence of securities and commodities derivatives markets has been debated for a long time. The Government of India has announced its intention to integrate the two markets. It is felt that convergence of these derivative markets would bring in economies of scale and scope without having to duplicate the efforts, thereby giving a boost to the growth of commodity derivatives market. It would also help in resolving some of the issues concerning regulation of the derivative markets. However, this would necessitate complete coordination among various regulating authorities such as Reserve Bank of India, Forward Markets commission, the Securities and Exchange Board of India, and the Ministry of Corporate affairs. Among the 145 traded commodities in all the commodity exchanges, the precious metals’ share in total turnover is relatively high compared to agricultural commodities. The trading in some agricultural commodities has been banned in January 2007, by the government following the undue price rise in these commodities. In order to examine whether and to what extent futures trading has contributed to price rise in agricultural commodities, the government has appointed a Committee headed by Prof. Abhijit Sen in 2007.
Abhijit Sen Committee In the past two years, a number of concerns have been raised regarding the trading in agricultural commodities, which led the government to set up this committee to probe into the role played by these exchanges in influencing the prices and thereby adding higher inflation. Four commodities (wheat, rice, urad and tur) were de-listed for futures trading towards the end of financial year 2006-07. This de-listing has been held responsible in many circles for the recent general downturn in futures trading in agricultural commodities. According to the report, these four de-listed commodities together accounted for only 6.65% of the total value of futures trading in all agricultural commodities in 2006-07. Thus, although this may have affected market sentiments adversely, the delisting did not have any major direct contribution to the decline in trading observed during 2007-08. For the study, the committee relied on WPI data as these are a closer proxy of producer prices of agricultural produce than retail prices. Of the 43 agricultural commodities that have futures trading, 24 commodities accounted for 98.7% of total value of futures trading of agricultural commodities in 2006-07. It was observed that reasonable degrees of liquidity in most of these commodities came much after they were notified for futures trading. For some commodities, even after some liquidity was observed, this did not grow or stabilize continuously thereafter. The main purpose of the study was to look into some characteristics of the Indian commodity futures market in order to judge whether prices indicate efficient functioning of the market or otherwise, particularly as this market is less developed compared to the financial derivatives markets, being constrained by its chequered history and with many policy reversals. The Abhijit Sen Committee concluded in its report that, “both the contemporaneous futures and spot prices contribute to price discovery and the futures market can provide information for current spot prices and thus help to reduce volatility in the spot prices of the relevant commodities and provide for effective hedging of price risk.” A study undertaken by the Indian Institute of Management, Bangalore (IIMB) about the impact of futures trading in some important agricultural commodities stated that, inflation did increase in some commodities after introduction of futures trading and that spot price volatility did not decline as unambiguously as claimed by the commodity exchanges. Conclusion Since 2003, when the first national level commodity derivatives exchange started, the exchanges have witnessed sluggish business in commodities futures trading. In the last four years, there has been a great revival of the commodities futures trading in India, both in terms of the number of commodities allowed for futures trading as well as the value of trading. The real issues faced by the futures market have yet to be resolved. Unless the real issues are sorted out as soon as possible, the objectives of setting up commodity derivative exchanges may not be achieved and the growth rates witnessed would not be sustained. The commodities futures markets are now over six years old and while the growth has been impressive, a lot can be done so that India becomes a price-setter in commodities at least where it is either a major producer or consumer at a global scale.
* This note is jointly prepared by Anita. B. Shetty and Anita. V. Naik
References
Abhijit Sen Committee Report (2008) : Report of the Expert Committee to Study the impact of Futures Trading on Agricultural Commodity Prices.
Narender L. Ahuja (2006): Commodity Derivatives Market in India: Development, Regulation and Future Prospects, International Research Journal of Finance and Economics, Issue 2.
Commodity Vision, Various Issues.
Forward Market Commission website: (www.fmc.gov.in).
Highlights of Curre
Agriculture Sowing activities have started in full swing in many parts of major rice-growing states of Andhra Pradesh, Chhattisgarh, West Bengal and Orissa due to revival of rains. As per the data of agriculture ministry, rice has been sown in 7.4 million hectares till July 10. Orissa has completed sowings in more than 33% of the 3.8 million hectares as produced last year. West Bengal, the biggest rice producing state with a production of more than 13 million tonnes last year, of which nearly one fourth of areas have started sowing activities. The central government as on 13 July cancelled permission for exporting 9 lakh tonnes of wheat, just within ten days after easing the ban on overseas shipment of foodgrain. This decision was taken due to fear that poor monsoon might impact kharif foodgrain and also the commitment to meet for the proposed Food Security Act. Food Corporation of India (FCI) and state government agencies have so far procured of 25.12 million tonnes of wheat from farmers in the current rabi marketing season as against 22.6 million tonnes purchased last year. This improvement is attributed to bumper production and higher remunerative price. Procurement of wheat is still going on only in Bihar, which is expected to complete over the next few days. Out of the total wheat procurement 70% of the contribution have been from Punjab and Haryana. Punjab and and Haryana have contributed a record 10.7 million tonnes and 6.9 million tonnes, respectively. In Uttar Pradesh, FCI has purchased 3.8 million tonnes of wheat while in Rajasthan and Madhya Pradesh, the state agency has lifted 1.9 million tonnes and 1.1 million tonnes, respectively. The central government is planning to allow private players to import white sugar. The amount to import could be either within the existing 10-lakh tonnes quota already allocated to the three organisations or within an extended quota of 15 lakh tonnes. Currently, only three state-owned agencies State Trading Corporation (STC), Minerals and Metals Trading Corporation (MMTC) and Project Equipment Commodities (PEC)– are allowed to import up to 10 lakh tonnes of white sugar at zero duty. Moreover, even this facility, is available only up to 1 August 2009. This duty-free import is expected to be extended till March 31, 2010. According to the data collated by the Ministry of Consumer Affairs prices of tur dal, have surged by 33% in just one month across the country on fears of lower output due to deficient rains and lack of options to import the commodity. Currently, price of tur dal (pigeon peas) is ruling at Rs 80 per kg in Delhi, Rs 73 per kg in Mumbai, Rs 70 per kg in Chennai and Rs 62 per kg in Kolkata. Currently, the government imports about 5 lakh tonnes of tur dal, though the shortage is to the tune of 10-12 lakh tonnes. Tur dal is largely imported from Myanmar, while some quantity is purchased from Tanzania and Malwa, but these two countries are usually not preferred because of high freight cost. Heavy physical stocks of imported edible oil lying at major ports, weak overseas market and slow but steady progress of oilseeds sowing is likely to reduce the pace of imports into the country over the next four months. Total import of edible oils in the month of June is reported to be at 7.80 lakh tonnes, up by 31%, over previous year, which is highest during the current season. During the first eight-month of the current season, total imports touched to 58.23 lakh tonnes, up by 80%, over previous season's 35.67 lakh tonnes. Import of refined oils during November 2008 to June 2009 was reported to be at 8.19 lakh tonnes (15%) over 2.05 lakh tonnes (7%) and crude edible oil was reported to be at 47.14 lakh tonnes over 28.91 lakh tonnes for the same period of last year. Maharashtra, the second largest cotton producer after Gujarat, has the largest area under fibre crop cotton. Sowings of cotton had fallen during the last month due to scanty showers, but revival of monsoon is likely to push cotton acreage to last year’s levels. It is projected that area sown under cotton may touch 3 million hectares to 3.13 million hectares in the year ending September 2010. As on 13 July, cotton acreage stood at 2.21 million hectares or 76%, to normal area. Estimates released by the state agriculture department in March displayed that there would be marginal increase in cotton acreage to 3.20-3.25 million hectares on an assumption of timely rainfall. According to the Coffee Board, exports of coffee declined by 20% to 1,08,386 tonnes during January-July 2009 from 1,36,220 tonnes during the corresponding period a year-ago. The export volumes primarily tumbled as Arabica parchment coffee from the country lost its demand in the global market. Arabica coffee exports fell by 43% to 16,241 tonnes from 28,600 tonnes a year ago. Robusta exports tumbled by 23% to 9,414 tonnes from 12,271 tonnes, while exports of Robusta cherry declined to 52,101 tonnes from 56,325 tonnes. Instant coffee exports dropped to 16,053 tonnes from 20,670 tonnes. Although Coffee Board has provided positive projection for the crop year 2009-10, the exact coffee output could be projected only after southwest monsoon as crop could be damaged if there is an erratic shower. The board's post blossom forecast for 2009-10 stood at 306,300 tonnes, up from the post blossom estimation for the previous year at 2, 93,000 tonnes. The government will issue soil health cards to all farmers in the country as it would give information about the soil quality and what is the normal quantity of fertiliser to be used for a particular crop Agricultural & Processed Food Products Export Development Authority (Apeda) reiterated that exports of banana to Europe and the Middle Eastern countries have surged by 89 % to 25,013 tonnes for April- January 2008-09 as against 13,207 tonnes in the corresponding period last year. IndustryThe Index of Industrial Production (IIP) stands at 281.9, which is 2.7% higher as compared to the level in the month of May 2008. The annual growth in the Indices of Mining, Manufacturing and Electricity sectors for the month of May 2009 has been 3.7%, 2.5% and 3.3% as compared to 5.5%,4.5%, and 2.0% in May 2008. In terms of industries, as many as 9 out of the 17 industry groups (as per 2-digit NIC-1987) have shown positive growth during the month of May 2009 as compared to the corresponding month of the previous year. The industry group ‘Other manufacturing industries’ (27.3%), Rubber,plastic, petroleum and coal products’ (16.4%) and ‘ wood and wood products (15.3%) have registered double digit growth during May 2009. On the other hand, the industry group ‘Food Products’ (-14.7%), Jute Textile ((-20%),have shown double digit negative growth.
As per
Use-based classification, the Sect oral growth rates in May 2009 over
2008 are 3.8% in Basic goods, (-)3.6% in Capital goods and 6.1% in
Intermediate goods. The Consumer durables and Consumer non-durables have
recorded growth of 12.4% and (-) 2.3% respectively, with the overall
growth in Consumer goods being 1.2%. InfrastructureThe Index of Six core industries having a combined weight of 26.7 per cent in the Index of Industrial Production (IIP) with base 1993-94 stood at 250.1 (provisional) in May 2009 and registered a growth of 2.8% (provisional) compared to a growth of 3.1% in May 2008. During April-May 2009-10, six core industries registered a growth of 3.9% (provisional) as against 2.7% during the corresponding period of the previous year. Crude Oil production (weight of 4.17% in the IIP) registered a growth of (–)4.3% (provisional) in May 2009 compared to a growth rate of 3.2% in May 2008. The Crude Oil production registered a growth of (-)3.7 (provisional) during April-May 2009-10 compared to 2.1% during the same period of 2008-09. Petroleum refinery production (weight of 2.00% in the IIP) registered a growth of (-)4.3% (provisional) in May 2009 compared to growth of 0.1% in May 2008. The Petroleum refinery production registered a growth of (-)4.4% (provisional) during April-May 2009-10 compared to 2.1% during the same period of 2008-09. Coal production (weight of 3.2% in the IIP) registered a growth of 10.2% (provisional) in May 2009 compared to growth rate of 8.8% in May 2008. Coal production grew by 11.8% (provisional) during April-May 2009-10 compared to an increase of 9.5% during the same period of 2008-09. Electricity generation (weight of 10.17% in the IIP) registered a growth of 3.3% (provisional) in May 2009 compared to a growth rate of 2.0% in May 2008. Electricity generation grew by 5.1% (provisional) during April-May 2009-10 compared to 1.7% during the same period of 2008-09. Cement production (weight of 1.99% in the IIP) registered a growth of 11.6% (provisional) in May 2009 compared to 3.8% in May 2008. Cement Production grew by 11.7% (provisional) during April-May 2009-10 compared to an increase of 5.4% during the same period of 2008-09. Finished (carbon) Steel production (weight of 5.13% in the IIP) registered a growth of 1.4% (provisional) in May 2009 compared to 3.3% (estimated) in May 2008. Finished (carbon) Steel production grew by 2.1% (provisional) during April-May 2009-10 compared to an increase of 1.4% during the same period of 2008-09. InflationThe official Wholesale Price Index for 'All Commodities' (Base: 1993-94 = 100) for the week ended 4 July 2009 rose by 0.7%. The annual rate of inflation, calculated on point to point basis, declined by -1.2% for the week ended 4 July 2009 as compared to a substantial increase of 12.2% during the corresponding week of the previous year. Price index of Primary articles remained stable at last week level of 258.5. The index of the major group fuel, power, light and lubricants rose by 3.1% due to higher prices of naphta (15%0, furnace oil (11%), petrol (10%), high speed diesel (7%), light diesel (45) and bitumen (2%). An increase of 0.2% has been witnessed in the prices of manufactured products mainly due to high price of coffee powder, oil cakes, ghee and sugar, imported edible oil etc. Final WPI for the week ended 1 May 2009 was revised upward to 234.2 from 232.0 as a result the corresponding inflation rate stood at 1.6% instead of 0.6%.
Financial Market Developments Capital Markets
Primary Market Adani Power Ltd got approval from the Securities and Exchange Board of India (SEBI) for its proposed initial public offer (IPO) on 14 July. The company will tap the capital market in the last week of July to raise around Rs 2,200 crore, to part-fund its upcoming power projects. Raj Oil Mills is entering into the capital markets with a public issue of 95 lakh equity shares with a face value of Rs 10 each. The company plans to raise a maximum of Rs 114 crore through the issue. The price band for the issue has been fixed between Rs 100 and Rs 120. The issue will open for subscription from 20 July to 23 July. Mahindra Holidays & Resorts, a Mahindra Group company, made its debut on the NSE on 16 July at a premium of 23% at Rs 370 over its issue price of Rs 300. On BSE, it was listed at a premium of 5% at Rs 315.
Secondary Market Markets opened weak but made sustained gains during the course of the week. A recovery of global markets and favourable cues from government pushed up the broad indices. Finance Minister’s statements on disinvestment and clarifications on borrowing programme were perceived as positive by the markets. The market recouped almost entire losses of the week earlier triggered by a disappointing Union Budget 2009-10. On 14 July 2009, the Union Finance Minister, Pranab Mukherjee, told Lok Sabha that the inance Ministry has initiated discussions with other ministries and departments for identifying the state run firms where a portion of Government shareholding can be sold. On 17 July 2009, Finance Secretary Ashok Chawla said that the Finance Ministry will introduce seven bills in parliament, including proposals for pension and banking reforms and efforts to raise the foreign investment limit in insurance companies. Chawla added that the government's record market borrowing of Rs 4,51,000 crore in 2009-10 would not pressure bond yields and interest rates. Better-than-expected results from Intel and Goldman Sachs and rise in metals prices improved sentiments. BSE Sensex edged up 1,250 points during the week and marked the biggest weekly gain since May 24 mustering 9.2% return over the previous week. The quarterly results announced until now were in line with market expectations and this capped any downside. The good progress of the monsoon also contributed to positive sentiment. NSE Nifty also surged with 9% plus returns. All the sectoral indices of BSE recorded positive gains over the week, following strong cues from the global markets and government’s announcement on initiatives on disinvestment. Realty index surged the most by 18% over the previous week as the sector pushed by the gains earned by DLF. Auto stocks were up after Bajaj Auto posted impressive growth for the June quarter. After investing around $8 billion between mid-March and mid-June, foreign institutional investors (FIIs) have started cutting down premiums for the Indian stock markets. Fund houses and distributors are increasingly using technology to expand their networks. Market experts said a number of players were keenly looking at low-cost methods to extend their reach after the Securities and Exchange Board of India banned charging of entry load on mutual fund investments.
Derivatives Due to positive global cues coupled with strong performance by the Indian IT and banking majors, the Nifty future witnessed a sharp recovery during the week. It closed at 4,381.5 against the previous week’s close of 3,993.2, posting a 9.7% weekly gain. In the process, the future also moved into premium over the spot that ended at 4,374.95 points. Importantly, the strong rally this time around was backed by high trading volumes. That said, a good part of the gains came on the back of a fall in open interest (OI); as against an OI of 2.25 crore shares previous week, it was lower at 2.14 crore shares during the week. The derivative market is generating near-record volume. In the futures & option (F&O) segment, the Nifty future closed at a premium of 6.55 points to the underlying and the volumes in the F&O improved to Rs 74,254.90 crore on 17th July 2009. The average volume during the week however was lower at Rs 61,135.04 crore. There was huge short covering in the Nifty near month future as well as some of the front-line Nifty components. For e.g., the Nifty future OI decreased by 10.96 lakh shares during the week. On 17 July the OI fell by 1.78 lakh shares and the total OI of Nifty near month stood at 2.14 crore shares. The index put call ratio (PCR) was 1.02 on 17th July 2009 as compared to 0.94 during the previous trading session, whereas the stock PCR increased to 0.37. Thus the market PCR was 1 as compared to 0.90 on 16 July 2009. The FII share of OI has dropped to around 32% in the past week – it's averaged 38% in the last couple of years. The cumulative FII position as a percentage of the total gross market position on the derivative segment as on July 9 slipped to 31.87% (33.69%). FIIs were net buyers throughout the week. They increased their index futures holding to Rs 8,490.59 crore (Rs 7,405.02 crore) and stock futures to Rs 19,065.46 crore (Rs 16,867.64 crore). They now hold index options worth Rs 25,237.23 crore. Volatility index ended the week on a flat note at 35.89 against last week’s close of 35.83.
Government Securities Market Primary Market 91-day Treasury Bills (TBs) 364-days TBs were auctioned on 15 July 2009, for the notified amount of Rs 8,000 crore and Rs 1,000 crore, respectively. For the 91-day TBs 77 bids have received out of 61 were accepted with the yield to maturity (YTM) of 3.28%. Similarly, for the 364-day TBs, 16 bids have accepted from 79 bids with the YTM of 3.69%. On 17 July 2009 the RBI re-issued government securities of 6.07% 2014, 7.94% 2021 and 7.40% 2035 securities with the notified amount of Rs 6,000 crore, Rs 4,000 crore and Rs 2000 crore, respectively. YTM for 5-years, 12-years and 26-years maturities paper were set at 6.49%, 7.17% and 7.74%, respectively.
Secondary Market The inter-bank call rate closed at 3.25-3.30% on the weekend. The call rate ranged between 3.25-3.30 throughout the week except on 16 July 2009 it came down and range between 3.20-3.30%. Uncertainty about governments borrowing programme have kept bond prices and yield fluctuating throughout the week. The week started with the bonds gaining ---- due to drop in oil prices and the announcement from the government to less the borrowing by 20% compare to previous week. But bonds prices declined on second day on speculation about increasing government debt sales. Price of the 6.9% note maturing on July 2019 has dropped by 30 paise to 100.50 leaving yield at higher level by 6.83%, yield of same bond has further increased 6.85% on the third day of the week but the rally in the bonds yield has arrested on the fourth day as yield plunge after the cue of governments smaller than expected borrowing plan for the rest of the first half of 2009-10. The yield on the most traded 6.90% 2019 bond ended at 6.79%. Bond yields ended flat to higher on Friday as the auction results were broadly in line with market expectations and ample liquidity offset on any near-term concerns about upcoming dept supplies. The yield of 6.90% 2019 bond was closed at 6.85%. The yield on the most traded 7.94% 2021 bond ended at 7.19%. The spread between 1-year and 10-year bond yields in India has widened more than tenfold this year to 2.9%, according to data compiled by Bloomberg, indicating less demand for longer-term securities as the government increases sales.
Bond Market During the week under review, five non banking financial institutions and four corporates tapped the bond market by issuing bonds and NCDs in a range of 7.0-9.15% coupon rate to mobiles an aggregate amount of Rs 2,855 crore.
Foreign Exchange Market On 13 July the rupee turned weak after losing 11 paisa to hit two months lows of 49.11 against the US dollar in early trade on expectations of increased capital outflows and hardening of dollar against other leading currencies. The next day the cost of five-year swaps climbed to 6.15% from 6.04%. The rupee rose for the first time in three days on speculation global investors will pour more funds into Asian assets as regional economies recover from the financial crisis. The rupee advanced 0.2% to Rs 48.96 per dollar. The currency is Asia’s worst performer this month with a 2.2% loss. On 15 July the rupee appreciated 0.6% to Rs 48.65. Eight of the 10 most traded currencies in Asia outside Japan advanced against the dollar. The rupee wiped off early gains in tandem with the stock market, and closed at 48.68/69 per dollar on 16 July. During the weekend rupee weaken further by six paise to Rs 48.72/73 against the dollar due to importers’ demand for the US currency, which was also strong overseas. Overall, despite the firm equity market, the rupee tended to move lower over the week due to a stronger dollar against the euro as well as some dollar demand from importers.
Commodities Futures derivatives The National Multi-Commodity Exchange (NMCE) has signed an agreement with Financial Technologies India (FTIL) for using its trading software, ODIN. It has paid Rs 75 lakh to FTIL for the trading solution, which is being used by five exchanges, including the BSE, MCX Stock Exchange, NSE, MCX and NCDEX besides five international exchanges. The software is also compatible with 150 exchanges across the world. NCDEX Spot Exchange has launched compulsory delivery contract of rape mustard seed on its electronic platform from 15 July. The delivery centre for the contract would be in Rajasthan with minimum trading lot of 10 tonne. According to Reuters poll of 13 analysts revealed that the sugar futures are expected to top recent 3-year highs by the end of 2009 due to strong import demand as India is a top consumer of sugar. Prices of most agri-commodities rose significantly in the futures market on 13 July on fears that sluggish sowing in the present kharif season due to delayed monsoon may lower the production. Insurance The Iffco-Tokio General Insurance company has introduced Barsha Bima Yojana (BBY), a weather insurance policy, for the Orissa farmers during the current khariff season. The scheme has been launched in 5 districts of the state on a pilot basis. BankingSome of the banks have declared their Q1:2009-10 results. State Bank of Travancore has posted an over three-fold rise in net profit during the first quarter of the current fiscal year 2009-10, compared to corresponding quarter of the previous year. State Bank of Indore, another subsidiary of the SBI has also posted increase in net profit by 81.5% to Rs 77 crore for the first quarter ended June 30, 2009 compared to Rs 43 crore in the corresponding quarter in the previous fiscal.
IDBI Bank’s net profit for the quarter ended June 30, 2009 has surged by around 7.5% to Rs 172 crore as against Rs 160 crore profit earned by the bank during the corresponding quarter in fiscal 2008-09. The country's second largest private sector lender HDFC Bank reported a 30.5% increase in net profit at Rs 606 crore for the first quarter 2009-10 against a net profit of Rs 464 crore in the first quarter of FY 2008-09. Shamrao Vithal Co-operative Bank, one of the leading urban co-operative banks in the country, has entered in a bancassurance tie-up with Bajaj Allianz Life Insurance. The RBI has imposed a penalty of Rs 1 lakh to Shree Patneshwar Urban Co-operative Bank, Raigad (Maharashtra) for not adhering to KYC norms issued by the apex bank. Vijaya Bank is planning to add 100 new branches in the current fiscal year, of which 14 would be in Tamil Nadu.
Corporate Bavina Cars India is planning to set up an electric car manufacturing unit near Chennai at an investment of Rs 300 crore, the first car is expected to be rolled out from the factory in 2011. The new project is likely to create employment for around 1,500 people. The Tata-owned Jaguar Land Rover (JLR) is planning an extended shutdown of its UK plants and new round of staff layoffs as it struggles to cope with the slump in the world car market. Sterlite Technologies has bagged an Rs 372 crore fibre-to-the-home (FTTH) network project from BSNL. The network would provide high-speed internet, IPTV solutions, Voice over internet protocol (VoIP) and other value added services to about 500,000 subscribers. Subsidiary of Construction firm Omaxe’s had entered into an agreement with the Allahabad Development Authority for development of a township in Allahabad. Chennai-based BGR Energy Systems has received the turnkey engineering, procurement and construction (EPC) contract for Chadrapur Super Thermal Power Stations in Maharashtra for Rs 1,632 crore. Sterlite Industries, India’s largest copper producer, has raised $1.5 billion (Rs 7,305 crore) through American Depository Shares (ADS), the largest US share sale from Indian in two years, to develop its power generation business and fund acquisitions. Singapore-based Changi Airport International (CAI) finally made an entry into India’s airport development business by announcing that it had bought 26% for $20 million (Rs 96 crore) in Bengal Aerotropolis Projects Ltd.
External SectorExports during May, 2009 were valued at US $ 11010 million (Rs. 53435 crore) which was 29.2 per cent lower in dollar terms (18.4 per cent in Rupee terms) than the level of US$ 15550 million (Rs.65506 crore) during May,2008. Cumulative value of exports for the period April- May, 2009 was US$ 21753 million (Rs. 107214 crore) as against US $ 31626 million (Rs. 129846 crore) registering a negative growth of 31.2 per cent in Dollar terms and 17.4 per cent in Rupee terms over the same period last year. Imports during May, 2009 were valued at US $ 16212 million (Rs.78682 crore) representing a decrease of 39.2 per cent in dollar terms (30.0 per cent in Rupee terms) over the level of imports valued at US $ 26684 million ( Rs. 112405 crore) in May,2008. Cumulative value of imports for the period April- May 2009 was US$ 31959 million (Rs. 157514 crore) as against US$ 51507 million (Rs. 211752 crore) registering a negative growth of 38.0 per cent in Dollar terms and 25.6 per cent in Rupee terms over the same period last year. Oil imports during May, 2009 were valued at US $ 4135 million which was 60.6 per cent lower than oil imports valued at US $ 10495 million in the corresponding period last year. Oil imports during April- May, 2009 were valued at US$ 7768 million which was 59.6 per cent lower than the oil imports of US $ 19244 million in the corresponding period last year. Non-oil imports during May, 2009 were estimated at US $ 12078 million which was 25.4 per cent lower than non-oil imports of US $ 16189 million in May, 2008. Non-oil imports during April- May, 2009 were valued at US$ 24191 million which was 25.0 per cent lower than the level of such imports valued at US$ 32262 million in April- May, 2008. The trade deficit for April- May,2009 was estimated at US $ 10206 million which was lower than the deficit of US $ 19880 million during April-May, 2008. Information TechnologyMumbai-based IT firm 3i Infotech is acquiring the entire 49% stake of Elegon Infotech from Yucheng Technologies, its joint venture partner in China. Post acquisition, the Elegon Infotech will then become a wholly owned subsidiary of 31 Infotech. In a bid to reduce costs, TCS has recalled close to 1,200 employees from the US and has decided not to hand out any salary increment this year. TelecomSistema Shyam TeleServices, a joint-venture between Russian firm Sistema and India’s Shyam Group, has signed a $70 million loan agreement with the Bank of China. The company will be using the loan to source supplies from telecom equipment provider. Japanese electronics major Panasonic is planning to introduce low-cost fixed and cordless phones in India to tripe its revenue to $36 million (Rs 175 crore) from the segment, over the next three years. The company has tied up with Airtel’s landline business and expects to sell around 70,000 cordless phones.
*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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