Sudip Bandyopadhyay’s Blog

Investors who filed into commodities when prices were skyrocketing last year were brought swiftly down to earth when the rally came to an abrupt halt a few months later.  The sudden economic downturn triggered fears that demand for oil and other commodities would dry up.   Investors fled from commodities and prices crashed.  Few areas escaped the melt-down.  Oil was one of the worst hit, losing about 75 per cent of its value in a matter of months.  Metals and soft commodities such as wheat, coffee and sugar also suffered sharp price falls.  Gold fared better as investors sought a safe haven from erratic equity markets, but still lost up to one third of its value.

Interest in commodities from private investors had been growing fast.  As well as a strong rise in prices, the asset class was considered a good diversifier from the more main-stream investments of equities, bonds and cash.  Access had also improved greatly in recent years, giving retail investors ways into not only oil and gold but also a whole host of other commodities such as industrial metals and agricultural products.  As a result, some investors were lured into a booming – but volatile – asset class without much consideration for the risks involved. However, advisers do not think investors will be scared off for long.  The recovery in commodities has already begun.  Oil hit $60 a barrel last month for the first time since November, while agricultural raw materials, from soya beans to corn, have clawed back value.

Fortunately, Indian investors have been far away from the Commodity markets due to prevailing market structure.  Indian Commodity markets continues to remain completely unorganized on the Spot / Cash side  &    organised trading through the exchange mechanism is at a very nascent stage with lack of infrastructure hampering storage and Warehouse Receipt trading.  On the Futures arena though the three National Exchanges are functioning for the last few years, trading is restricted to Indian investors with ban on investments  by Banks / Mutual Fund, FIIs, FIs, etc.  Even PMS is not permitted for Commodities.  The market participants are predominantly traders and speculators with complete absence of investors in this space.

While the recent budget laid emphasis on urgent creation of Infrastructure and Inclusive growth, concrete steps in the arena of Commodity markets are yet to materialise.  In an economy where 70 per cent of the population depends on commodities, directly or indirectly, for livelihood, it is high time the government introduces the required reforms in the areas of Commodity  trading, Warehousing,  etc. to create the enabling environment for rapid economic development.