What Modi recommended on futures trade in essential items

Heading a panel, the Prime Minister had called for integration of spot and futures markets

 

More than three year ago, Narendra Modi, chairing a working committee to suggest steps for reducing gap between the farmgate and retail prices and recommending an action plan for better implementation and amendment to Essential Commodity Act (ECA) had submitted a report.

This report is insightful, constructive and radical in its approach.

The highlights are: speedy reform of APMC Act across the country and liberalisation of agri-markets; explore unbundling of FCI operation in terms of procurement, storage and distribution functions; to set up a ministerial level coordination mechanism at the national and the regional level for coordinated policy making for evolving single national agriculture market; recommended that offences under Section 10-A under the Essential Commodities Act should be made non-bailable and special courts should be set up for speedy trial of offences under the ECA.

The report had touched on the issue of information asymmetry both on the demand as well as on the supply side.

Data flow

It had pointed that if the collation and capturing of data is supplemented with the flow of information then it would fundamentally change the face of market. If necessary, it could done by creating a dedicated agency for the purpose.

Needless to mention that India’s commodity futures market has brought in a significant change in the last ten years where “reference price” are often used by the trade for purchase as well as production decisions. The report had observed that “until effective integration of futures and spot markets is achieved, we should be cautious about the futures trade in essential commodities.”

The report further said: “Since food security being the utmost concern, for the time being there should be a ban on the trading of essential commodities in the futures market” ( Point 2.7, Page 8).

Futures market

Today, as Modi is the Prime Minister of the country and embarking on a paradigm shift what does one expect? Does this mean that the futures market should keep the essential commodities such as wheat on the watch list for possible trade suspension? The report has, however, said that futures of the other commodities can be permitted. (Page 17, Point e.4)

The report also mentions about the “market failure” and traders making excessive profits. However, no evidence or empirical data has been provided to substantiate the point.

The report talks about the creation of agri-infrastructure and, in its recommendation, has laid emphasis on post harvest linkages. It talks about the Government providing financial assistance for construction of godowns at village levels along with godowns at PACS (Primary Agricultural Co-operatives Societies). While it is appreciated that the recommendation has looked at “small is workable,” it has may have erred in recommendation of PACs in the role which does not have any specialised functional expertise.

This report is a document which gives 20 recommendations with 64 detailed actionable points that will facilitate expeditious implementation.

The report has largely been ignored till now, however, the committee needs to be complimented for taking the bull by its horns and addressing the issue which will have significant impact during the tenure of the current government.

Why the rupee is on a slippery slope

The currency is the worst performer in the emerging markets after the Iraq crisis broke out

 

Rising crude prices are once again exerting pressure on the Indian rupee. The currency moved below the 60 mark against the dollar on Monday and is currently threatening to cross 60.5. That the fate of the rupee is closely linked to crude prices is not a secret; import of petroleum and oil products make up over 35 per cent of India’s merchandise imports.

The rupee is down 1.75 per cent after the Iraq crisis broke out, making it the worst performer in the emerging market currency basket in this period.

The inelasticity of demand for petroleum products within the country, coupled with the inability of the government to adjust domestic supply in line with demand at short notice, renders the country vulnerable to sudden spikes in global crude prices. Brent crude prices moved from $109 on June 11 to the current $113.5 — up 4.3 per cent.

But besides crude prices, there are other reasons why the rupee will continue to be under duress this calendar.

Foreign capital flows

The rupee’s surge since the beginning of this calendar year has largely been due to foreign institutional investors buying Indian equity and debt. These investors net purchased $10 billion of Indian equity and $9.9 billion of debt, anticipating a change in the government at the Centre.

But while foreign investors in equity could be taking a bet on the economic revival and consequent change in company earnings, debt investors are more fickle and their investments are closely linked to the currency and interest rate differentials between various countries.

It was observed last year that as the rupee plumbed the low of 68.8 in August, FIIs had pulled out $12 billion between June and December 2013. Such situations have the potential to develop into a vicious cycle. As rupee depreciates on FII outflow, other FIIs, too, follow suit, selling debt as they do not wish to suffer forex losses, leading to further rupee depreciation.

These short-term foreign investors also tend to take money back to their home countries in periods when risk-aversion soars. If the Iraq conflict escalates, money will flow back to destinations such as the US, as over half of the global foreign investors are from that country.

Current and capital account

Of late, there  has been much rejoicing as the current account deficit for the December 2013 quarter declined to $4.2 billion, thanks to the regulators clamping down on gold imports. But RBI has recently relaxed some of these restrictions, enabling jewellers to import gold easily. This is expected to increase India’s gold imports. Increase in crude prices will widen this gap further.

The current account deficit in recent years has been bridged with the aid of net receipts in the capital account; mainly FDI and FII flows. In periods of turbulence, the entire balance of payments can turn adverse as flows in the capital account too turn negative.

Reserves

The foreign exchange reserve, currently at $312 billion, is not too comfortable either. While this is 13 per cent higher than the low of $275 billion hit in September last year, it is still below the peak of $320 billion hit in August 2011. The reserves are sufficient to service only eight months of imports. This is still below the import cover of 10 months that is preferred.

There are other worries too in the form of expanding external debt and fear of rising inflation as the poor monsoon leads to crop failure. The proposals in the Union Budget will also be keenly watched by global investors to gauge the government’s resolve on the reforms front. Any disappointment there can send equities crashing, sending the currency further lower.

It is to be seen how much the elevated Indian interest rates and the additional liquidity unleashed by the ECB will mitigate these factors.

MCX gets shareholder nod to move FTIL stake into escrow account

In a major relief, the Multi Commodity Exchange has received shareholder approval to transfer promoter Financial Technologies’ stake into an escrow account, and sell it off if the promoter fails to find a suitor for the same.

Commodity market regulator, Forward Markets Commission, declared Financial Technologies (FTIL) not ‘fit and proper’ to hold stake in the commodity exchange, after its subsidiary National Spot Exchange failed to settle trades worth ₹5,600 crore entered on its platform. The Commission directed FTIL to pare its stake to two per cent from 26 per cent.

Stumbling block

The re-negotiation of the technology supply contract FTIL has with MCX seemed to be the stumbling block in stake sale. The contract has a tenure of 33 years with stringent exit clauses, delaying the re-negotiation.

Since there was not much progress in the implementation of its order, FMC banned MCX from launching new contracts till the promoter abides by its order.

Caught between the promoter and the regulator, the board of MCX sought shareholder approval to amend the Articles of Association and transfer the promoter’s stake to the escrow account, and put it on sale to meet the regulators’ diktat.

Of the 267 valid ballots, 13 shareholders voted against the resolution to alter the Memorandum of Association of the company, while 16 investors voted against the second resolution on alteration to Articles of Association of the company. Nearly 27 per cent of the non-FTIL shareholders participated in the voting for two resolutions and both the resolutions were approved by around 95 per cent voting in favour. FTIL was not allowed to participate in the voting process.

The first resolution was to give powers to sell stake of FTIL while the second was an amendment in the Articles of Association.

Shares of MCX were up 0.6 per cent at ₹615.65 on Wednesday.

Bill in Budget session to amend Forward Contract Regulation Act

Amendments to give more teeth to regulator, introduce new products. The Finance Ministry is considering tabling amendments to the Forward Contract Regulation Act, 1952, in the next session of Parliament, slated to be held in the second week of July.

The amendments seek to not just give more power to the commodity market regulator, the Forward Market Commission (FMC), but also pave the way for introduction of new products, such as options, in the market. There is also a move to allow banks and foreign institutional investors (FIIs) to take part in the commodity markets.

However, this will require an amendment in the Banking Regulation Act and the SEBI Act.

The Bill for amendments was tabled during the 15{+t}{+h} Lok Sabha, but could not get passed even after the Standing Committee submitted its report. The Bill lapsed with the dissolution of the House.

With the new Government, led by Narendra Modi, already kicking off the process to introduce the Bill in Parliament, it is clear that at least for the time being FMC will not be merged with SEBI.

Last week, Finance Secretary Arvind Mayaram had said, “We are hopeful that very soon we should have a new statute in place which will provide greater regulatory authority to FMC.”

An autonomous independent regulator is absolutely critical to providing strength and depth to the commodities market, he added.

The new Bill is also likely to include suggestions given by the DS Kolamkar Committee, mainly on facilitating frictionless arbitrage between the spot and futures market, which is key to fulfilling the objectives of price discovery and hedging.

The committee was set up in wake of the ₹5,600 crore NSEL scam, following which the commodity market and FMC were transferred to the Finance Ministry from the Consumer Affairs Ministry in September 2013.

The committee focussed on reduction of trading costs and suggested that one way to reduce the capital cost for a commodities trader was to make banks and other financial institutions an integral part of trading. It also suggested that foreign financial firms (intermediaries and end-users) should be permitted to participate in commodity futures trading.

The existing system of limits on open interest and risk management provides adequate safeguards against the risk of allowing foreign participation in Indian markets, it said.

The committee also recommended that the Government exempt arbitrageurs from restrictions on holding inventory under the Essential Commodities Act, 1955.

To assist the development of organisational capability of firms operating in the commodity futures ecosystem, the Government should stop the suspension of trading in an abrupt and unreasoned manner, it suggested.

The Latest From Iraq - The Complete Troop Movements

 The Institute for the Study of War notes, the violent clashes continue from north to south in Iraq.

Source: ISWIraq

Blockade at Vale’s Onça Puma nickel project in Brazil ends

A blockade at Vale’s Onça Puma nickel project in Brazil has ended after the indigenous people who had occupied the area demanding better compensation left the plant, the miner said on Monday June 16.

Nearly 350 indigenous people of Xikrin do Cateté had blockaded the entrance of the plant in the Brazilian state of Pará on Monday, after having occupied the area the previous week from Thursday morning until Saturday evening. "Workers exit was not blocked. Only nickel production was paralysed," federal prosecutors from Pará state said.

Shanghai copper backwardation swells in squeezed market

The backwardation on the Shanghai Futures Exchange (SHFE) expanded sharply on Monday June 16, as some holders of short positions were squeezed ahead of the exchange’s June prompt date.

The outright price on the June copper contract, with delivery date of Monday, surged by some 1,590 yuan per tonne, or about 3.25%, in just the final half an hour of trading. The contract closed at 50,450 yuan per tonne, some 2,710 yuan per tonne higher than the September contract. "The large backwardation and the increase in the June contract are due to long investors squeezing the market," the head of futures at one big smelter said.

Month	Options	Charts	Last	Change	Prior Settle	Open	High	Low	Volume	Hi / Low Limit	Updated
Legend: Options Price Chart About This Report
JUN 2014	JUN 2014	Show Price Chart	3.0600	+0.0130	3.0470	3.0620	3.0620	3.0575	20	No Limit	01:08:09 CT 17 Jun 2014
JUL 2014	JUL 2014	Show Price Chart	3.0605	+0.0105	3.0500	3.0480	3.0645	3.0445	5,479	No Limit	01:08:25 CT 17 Jun 2014
AUG 2014	AUG 2014	Show Price Chart	3.0530 b	+0.0060	3.0470	3.0445	3.0600	3.0440	15	No Limit	01:08:09 CT 17 Jun 2014
SEP 2014	SEP 2014	Show Price Chart	3.0535	+0.0095	3.0440	3.0440	3.0585	3.0375	1,389	No Limit	01:08:09 CT 17 Jun 2014
OCT 2014	OCT 2014	Show Price Chart	3.0435	-0.0015	3.0450	3.0435	3.0435	3.0435	1	No Limit	01:08:09 CT 17 Jun 2014
NOV 2014	NOV 2014	Show Price Chart	3.0525	+0.0085	3.0440	3.0420	3.0525	3.0420	6	No Limit	01:08:09 CT 17 Jun 2014
DEC 2014	DEC 2014	Show Price Chart	3.0500	+0.0075	3.0425	3.0400	3.0540	3.0400	136	No Limit	01:08:09 CT 17 Jun 2014