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February 15, 2008

Trouble at Indian commodities markets?

Businessworld has a cover story on the functioning (or the lack thereof) of Indian commodities markets.

The government, for its part, has erected artificial barriers such as hedging limits through the FMC, rendering the market platform useless in many cases. For instance, Indian companies manufacture 28 million tonnes of sugar annually but the hedging limit per company is just 10,000 tonnes. “A company wants to hedge its future production today to ensure that a downward price movement doesn’t hurt it. Sugar is produced only four months in a year and sold throughout. It is ridiculous to impose a limit of 10,000 tonnes on say, Bajaj Hindusthan, which has a capacity of two million tonnes a year!” says Kiran Wadhwana of International Trading Co, which advises companies on hedging practices.

...The increasingly unhealthy rivalry between NCDEX and MCX only worsens matters. Their opposing views on vital issues, such as public listing, delay policy decisions. NCDEX believes that markets have not matured. It sees an exchange as the first-level regulator and vetoes listing at this stage of development. MCX, on the other hand, sites listing of exchanges world over, interpreting this as a readiness for public or investor scrutiny. NCDEX surely has a tough job on its hands, more so because of the number of agri-commodities it has thrown open for trading. Its rival MCX, which strategically focuses mostly on metals, and within metals, on bullion, does not face delivery or price discovery problems.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.