Commodities futures trade volumes fall for second year

(Reuters) – Commodity futures trading volumes in India fell 40.49 percent in the year to March 2014, its second straight year of decline, the market regulator said on Tuesday.

In value terms, futures trading at commodity exchanges fell to 101.44 trillion rupees in the first twelve months from April 2013 from 170.46 trillion rupees a year ago, the Forward Markets Commission said in a statement on its website.

Trading in gold bullion fell more than 25 percent to 43 trillion rupees in the year to March 2014, from 78 trillion rupees in the same period last year. Metals volumes fell 46 percent to 17 trillion rupees, and volumes in agricultural commodities fell 25 percent to 16 trillion rupees.

The plunge in volumes and lack of fresh capital is expected to cause at least one national-level exchange, the Indian Commodity Exchange controlled by Reliance Capital (NSI:RELCAPITAL), to shut down.

The world’s second-biggest buyer of gold and second-biggest producer of wheat, India allowed commodities futures trading only in 2003. But enthusiasm has dried up since a scam was unearthed last July at the National Spot Exchange owned by Financial Technologies India, which also owns the largest exchange, the Multi Commodity Exchange (MCEI.NS).

In addition, also last July, India levied a Commodities Transaction Tax (CTT) of 0.01 percent on trade of all non-agricultural commodities futures and a few agricultural commodities futures, and increased restrictions on imports of bullion.

“The very first jolt was that when CTT was introduced and then the NSEL fiasco,” said Haresh Galipelli, vice-president, Inditrade Derivatives and Commodities in Hyderabad.

“We have already seen peaking of retail participation and for the market to reach new level, we need more participation of banks, institutions….”

India has 21 commodity bourses, including six operating at the national level, trading about 80 commodities ranging from gold to carbon credits. Foreigners are still not allowed to trade in futures, but can buy stakes in the exchanges.

“Consolidation will continue in commodity trading unless we pass the FCRA (Forward Contract Amendment Bill) and launch innovative products like options,” Galipelli said.

The bill has been pending in parliament for a decade.

Commodities trade dips over 36% in Apr-Dec

Commodities exchanges saw a heavy decline in trading during the first nine months (April-December) of the current fiscal. This comes in the backdrop of all-round deceleration in agri and non-agri commodities trade.

According to the latest data from commodities market regulator Forward Markets Commission (FMC), trade was down both in value and volume terms.

In terms of volume, the total trade declined to 71.22 crore tonnes in April-November 2013-14, from 112.38 crore tonnes in the corresponding period last year. At the same time, the trade value shrunk to Rs 82.46 lakh crore (Rs 129.62 lakh crore).

Market analysts said though commodities transaction tax (CTT) had been imposed only on non-agri commodities, it had impacted the overall mood in the market. As a result, trade value for agri commodities and bullion (gold and silver) saw a significant decline.

Lower volatility and higher bid-offer spread (impact cost) also hit intra-day traders, as transaction costs increased drastically, the analysts said.

This drove away genuine hedgers who felt the pinch of the rise in hedging costs. At the same time, trade volume was impacted by fund diversion from commodities to equities, as riskier asset classes gave better returns in 2013.

The other reason for the decline in trade, the analysts said, was negative sentiments due to the NSEL payment crisis.

Rupee depreciation, too, increased volatility in commodity prices, as did the levy of higher margins and the abnormal spread in future contracts.

On the global front, quantitative easing or tapering by the US by reducing its monthly bond buying programme to $75 billion from $85 billion forced hedge funds and portfolio managers to readjust their portfolios. Since only newer financial companies are getting involved as active counter-parties on commodity exchanges.

Vandana Bharti, Assistant Vice-President (Commodity Fundamental and Research) with SMC, has outlined a strategy to grease the wheels of the market.

More platforms

This includes giving more platforms to corporate hedgers for physical exposure, proactive policies to help the exchanges grow by introducing options, integration with banks and allowing them to participate in the commodity markets and introduction of an e-trading platform as in CME Globex, among others.

“Farmers must want to take advantage of commodity exchanges, banks must trust them, the government must support them and everyone must recognise the value they add,” she said.

Govt allows deduction of CTT as part of business income.

In a relief to commodity exchanges, the government has allowed deduction of Commodity Transaction Tax (CTT) to traders as it forms part of their business income.

The move will benefit Multi Commodity Exchange of India (MCX), National Commodity and Derivatives Exchange (NCDEX), and Universal Commodity Exchange (UCX). The government may withdraw the recognition of these exchanges if found violating specified income tax norms.

This notification will remain in force until the approval granted by the commodity markets regulator Forward Markets Commission is withdrawn or expires.

Reacting on the development MCX said: "Trading on Exchange will get tax benefit deduction under Section 43(5) of the Income Tax Act". This will instill confidence in the market, increase hedgers' participation and put commodity futures trading at par with other exchange-traded asset classes, it said.

CTT of 0.01%, imposed on both buyer and seller of commodity on exchange platform came into effect on July 1. It is applicable on non-agricultural commodities and 11 processed foods. The tax imposed has dampened the business of these exchanges and their turnover has come down by 32% to Rs 74.16 lakh crore so far this fiscal.

Commodity Volumes

India is an elastic market, key fundamental data and announcements can have drastic effects on trading activity. Earlier this year, India’s government put new measures in place to tax commodity trading, the Commodity Transaction Tax (CTT) was implemented despite protest from the chiefs of all major commodity trading venues. As expected, trading volumes slumped with activity believed to be 40% to 50% lower.

Amar Ambani, Head of Research at IIFL, an Indian regulated broker explained to Forex Magnates in a statement: “Levy of 0.01% CTT has definitely dampened the volumes on the commodity bourses, with MCX average daily turnover down by drastic 40%. This can be explained by the fact that jobbers (speculators) which contributed 40-50% of the MCX volumes are out of the business. Jobbers survived on wafer thin margins and proportionately paid very low transaction costs. After the advent of CTT, the costs have dramatically increased, which has made it difficult for the price sensitive jobbers to sustain.”

2014 will be an interesting year for India as the 1.2 billion nation goes to vote. The right-wing BJP is in pole position to overthrow a controversial Congress Government. Asad Hussain a Mumbai-based analyst explained to Forex Magnates: “The BJP is a favourite among India’s business community, polls carried out by Team Cvoter show that BJP could win 162 seats next year.”

Commodity futures turnover in India rose 4.7 percent to 28.16 trillion rupees in April and May

India has 21 commodity bourses, including six operating at the national level. 

Foreigners are still not allowed to trade in futures, but can buy stakes in commodity exchanges in the world's second-biggest producer of wheat and biggest buyer of gold.

Agricultural futures fell 26.46 percent to 2.5 trillion rupees in the first two months of the financial year starting from April. Cumulative turnover for bullion rose 4.23 percent to 13.52 trillion rupees, the market regulator said in a statement.

"As far as commodity futures turnover is concerned, tough times are ahead," said Harish Galipelli, head of commodities and currency, JRG Wealth Management.

Volumes will take a hit due to the commodities transaction tax as the cost of transaction will increase, making it difficult for jobbers, traders to enter and exit, he said.

CTT will be levied at 0.01 percent of the value of transaction on all non-agricultural commodities, but the date of implementation has not been fixed.

Commodity exchanges in India, which allowed futures trading in 2003, trade in about 80 commodities ranging from gold to carbon credits, but most of the volumes are cornered by 8-10 commodities.

CTT Could Be Delayed To October 2013 - Commodity Transaction Tax

Punters may be able to breathe easy for a while longer as the new transaction tax on non-farm futures could be delayed with the administering body, Central Board of Direct Taxes, or CBDT, working out procedural details relating to how the levy would be collected, according to government sources. 

The imposition of CTT was announced by finance minister P Chidambaram during his presentation of the FY14 Budget in February. Along with CTT, Chidambaram reduced the Securities Transaction Tax (STT) in the equity derivatives segment, which was notified last month and became effective from June 1. However, there has been no notification on CTT even three months after its announcement. "It is likely that CTT could come into effect from the month of October" said one of the sources. 

The delay led to some commodity market officials doubting whether the tax could be made retrospective. However, an official from one of the leading commodity exchanges said they were told by income tax officials that since the nature of the tax requires it to be collected from a third party, it would not be imposed retrospectively. Exchanges are required to deduct both CTT and STT from brokers or trading members and deposit it with the income tax department. 

In the equity segment, STT was cut to Rs 10 per lakh from Rs 17 per lakh in FY14 Budget. CTT will be charged at the same rate on non-agri commodity futures. Effectively, traders will have to pay 0.01% tax, that is, Rs 10 for a transaction value of Rs 1 lakh. The current transaction cost (without any tax) is less than a third of this in commodity futures. Commodity exchanges had strongly resisted CTT imposition, but finance ministry was of the view that most non-agri trades were speculative in nature, so a tax was justified. 

Both NSE and BSE together pay STT between Rs 5,000 crore to Rs 7,000 crore and government could end up earning similar revenue from CTT once it is imposed.

Source : Economic Times