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  History of Commodity Futures in India  
 
Trading in Commodity Futures is believed to have originated in Japan as early as 17th Century for Silk & Rice. But the concept became popular only after the establishment of Chicago Board of Trade in Chicago, USA in the middle of 19th Century.

History of Commodity Futures trading in India


There are strong grounds to believe that Commodity futures could have existed in India for thousands of years. References to the existence of market operations similar to the modern day Futures market are found in Kautilya’s ‘Arthasastra”. Other factors which support such a belief is the existence of words like “teji’, ‘mandi’. ‘gali’, ‘phatak’ etc., for centuries. Be that as it may, the Futures markets in its organized form appeared only in the late 19th Century, with the advent of the British.

Important milestones in Commodity Futures Trading in India

1875 - Bombay Cotton Trade Association: While there is a viewpoint that Futures Trading has existed in India for thousands of years, the first organised futures market was established only in 1875 by the Bombay Cotton Trade Association to trade in cotton contracts. This occurred soon after the establishment of trading in Cotton Futures in UK, as Bombay was a very important hub for Cotton Trade in the British Empire.

1893 - Bombay Cotton Exchange Ltd: Following widespread discontent amongst leading cotton mill owners and merchants over the functioning of the Bombay Cotton Trade Association, a separate entity, by the name "Bombay Cotton Exchange Ltd." was constituted.

Soon after the commencement of Cotton Futures, Futures trading in Oil Seeds was started by the formation of Gujarat Vyapari Mandali, which was established in the year 1900 in Mumbai. It is currently known as “The Bombay Commodity Exchange Limited” (BCE).

Futures trading in Raw Jute and Jute Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd., in 1919. Later East Indian Jute Association Ltd. was set up in 1927 for organising futures trading in Raw Jute. These two associations amalgamated in 1945 to form the present East India Jute & Hessian Ltd., to conduct organized trading in both Raw Jute and Jute goods. Futures trading in raw jute suspended in 1964 reportedly on the insistence of the then State Government (WB Govt.)

 

as there were too many reports and allegations of price manipulations which left the farmer in the lurch. The Government had no other alternative but to suspend it. The announcement to reintroduce it was made in February 2003 after the Union Government had pressed for its return.

Through Online Futures trading with demutualised set up, which has more transparency, we can hope that proper futures trading will take place in Raw Jute in India now.

The dark age of Futures trading in India

The subject of futures trading was placed in the Union list, and Forward Contracts (Regulation) Act, 1952 was enacted. Futures trading in commodities, particularly, cotton, oilseeds and bullion was at its peak during this period. However, following the scarcity in various commodities, futures trading in most commodities were again prohibited in mid-sixties. There was a time when trading was permitted only two minor commodities, viz., pepper and turmeric. By 1996 there was almost a complete ban on Futures Trading.

Steps taken towards revival of Futures Trading by Government of India

The Government of India during the period 1950 to 1993 constituted many Expert Committees to study the various aspects of Futures Trading. These were (1) The Shroff Committee; (2) Dantwalla Committee; (3) Khusro Committee & (4) Kabra Committee. The reports of these Committees helped to lay down the framework for the revival of Futures Trading in Commodities in India.

In the early 1990s the Forex Crisis and liberalization of the economy lead to policy changes in India. These led to the re-introduction of futures trading in commodities. With a view to protect Farmers, Traders & Exporters from Price fluctuations of Commodities and to serve as an efficient ‘Price Discovery’ mechanism, Government of India took the landmark decision in April 1999 to remove all the commodities from the restrictive list for Futures Trading. Government also allowed setting up of new, modern, demutualised, Nation-wide multi-commodity Exchanges with investment support from public and private institutions.

National Multi Commodity Exchange of India Limited (NMCE), was the first such exchanges to be granted permanent recognition by the Government. NMCE commenced futures trading in 24 commodities on 26th November 2002 on a national scale. Currently (August 2007) 62 commodities are being traded in NMCE.

 

Multi Commodity Exchange of India (MCX) was established in November 2003 and is a leading Exchange for Bullion & Energy sectors.

National Commodity & Derivatives Exchange Limited (NCDEX) commenced operations in December 2003 and currently facilitates trading in 57 commodities.

The establishment of Exchange accredited Warehouses, which issue Warehouse Receipts, which can be traded, added impetus to the growth of Futures Trading. Introduction of ‘scrip’less Trading (in Dematerialised or DMAT form) in Capital Markets paved the way for introduction of Demat-holdings of Commodities.

Commodity futures can be looked upon as an option for those who want to diversify their portfolios beyond equities, interest bearing securities or investments and real estate. For Traders & Exporters, it is an efficient mechanism to protect themselves against price fluctuations. Last but definitely not the least, for the farmers, Commodity Futures is a very efficient Price discovery as well as Price recovery mechanism.

The size of the commodities markets in India is quite significant, constituting about 58% of the country’s GDP. Commodity Futures trade has seen crossing Rs.12,000 crores turn-over a day in March 2005. On an average, the all India turn-over in the commodity futures is over 7400 crores a day (July 2005). This sector has seen this growth just within the three years of its introduction. While comparing the growth of stock market in India, this pace of growth in commodities points to the fact that in the next 2-3 years, Commodity Futures may overtake Stock Markets in terms of volumes in India.

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