Introduction, Contents, Foreword, From the Editorial Desk ... - MCX

Healthy market growth
– in need of policy
initiatives
Markets facilitating the trade in
commodity-based derivatives in
India are regulated under the Forcorrection
of prices pending for
long. The double whammy is due
to volatility adversely impacting
food prices and input costs and,
thus, the bottom lines of industries
using them as raw materials. The
state machinery often tries to
intervene in the market to cushion
both sides of the market by absorbing
such volatility often at the cost
of the exchequer.
The moot point is that risks associated
with commodity price spikes
and volatility have, in recent times,
risen considerably and affected
more and more economic entities
that are being exposed to risks
associated with increasing volatility
while being ever more aware of
the impact of this exposure on their
economic pursuits. While they
seek to cover these risks through
hedging against commodity price
movements, how attractive does
the market they approach appear.
The E&Y survey found nearly all
respondents to hedge through
recourse to plain vanilla products
alone. Significantly, about 68% of
them had a hedging horizon of less
than three months, indicating that
they could not explore possibilities
of long-term hedging to protect
long-term business cash flows.
Clearly, there is a demand for
safe hedging through a variety of
hedging instruments, many more
than what the market currently
provides. While OTC forward
contracts can fulfil the demand
for customised hedging products,
they lack the kind of liquidity
and safety that exchange-traded
and exchange-cleared derivatives
provide. The market for the latter,
unfortunately, seems to have
run into a wall as the supply of
67.4%
To 11.5% – Companies’
net profits gyrated, as
wildly as this, in the past 3
quarters. Surely, a robust risk
management tool like commodity
futures could have helped
lock in input costs at
predetermined
levels.
products has scarcely been able to
match their ability and needs. The
reason, as has been elucidated in
several fora by several constituencies
in recent years, is the slow pace
of policy and institutional reforms
for nurturing the use of commodity
derivatives by the stakeholders
in India.
A PwC & MCX Joint Endeavour | 13