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What Role Does Commodity Market Play in India

Published : June 10, 2021

Role of Commodity Market

The Indian commodity market and the commodities trading have existed for years now in the country. However, officially the exchange-traded mechanism in India started somewhere around 2003. Despite various issues, there is a viewing and trading platform for commodities in India.

The commodity markets have always remained a little less popular compared to stock markets. But, the commodity markets play a vital role in the development and functioning of the Indian economy.

Here are some important roles that the Indian commodity market plays.

Essential Role of Commodity Market in India

Higher Investment in Indian Agricultural Ecosystem

The absence of well-developed post-harvest infrastructure in India happens to be one of the biggest challenges for the agricultural sector in the country. This results in the loss of a substantial amount of food grain during the transmission thereby adversely affecting their prices putting the farmers at loss. A well-regulated commodity market will act as a boon for all the stakeholders including farmers, brokers, middlemen, consumers, and investors. This will also encourage greater investments in the agricultural ecosystem in the form of better warehousing facilities and improved transportation systems. This, in turn, can also result in a developed ecosystem.

Aggregation and Financing of the Agri Sector

Indian farmers are not only small but are also highly dispersed. This dispersion of the farmers poses to be yet another challenge. An aggregator comes to the rescue in such a scenario. The role of an aggregator currently is played by the middlemen, which hampers the transparency of the entire mechanism. An organized commodity market, in this case, will prove beneficial to play the role of an aggregator effectively for the agricultural produce. Dispersed farmers can make the best use of the organized mechanism of the commodity market. The second aspect of the commodity markets happens to be financing. Commodity markets provide an opportunity to raise finances against the warehouse receipts thus prohibiting the agricultural sector to depend on the unorganized sector.

Ensuring Food Security

Bad warehousing facility in India is forcing the farmers to take risks with their farm produces. However, the futures market can be used effectively by farmers for selling their grains by locking in a price. This will ensure that the price fluctuations do not adversely affect the prices. Oversupply of a single commodity in the market weakens the prices which can be overcome by selling futures on that particular commodity at a price that is remunerative for the farmers.

Net Asset Class for Retail Investors

Indian investors for long have been limited to traditional asset classes like physical gold, real estate, bonds, FDs, and other safer investment avenues. However, investors indirectly invested their money in the commodities through equities. A regulated and organized commodity exchange (MCX, NCDEX, ICEX) provides an opportunity for small and medium investors to participate directly in the new asset class i.e., in commodities. This also helps the investors in diversifying their investment portfolio. It also offers a wide range of commodities ranging from agriculture to metals for investors to put their money in.

Distributing the Risk

The commodity market offers yet another benefit of reducing the risk and protecting the investors. It also helps in hedging prices. For instance, if an investor wants to hedge against the gold prices he can do so by selling the gold futures at a locking price. A regulated commodity market granulates the risk by making a large group of investors share it.

The Indian commodity market is still growing and has a long way to go yet. Despite the less popularity compared to the equity markets, the commodity market manages to play a vital role in discovering prices, hedging risks, and in developing the Indian economy.

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