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"It is easier to track commodity prices"

The investment universe for Indian investors has usually revolved around stocks, bonds, fixed deposits, mutual funds, etc. But there is
a world which exists beyond these, and its booming. Ever since the government lifted the 30-year ban on futures trading in
commodities last year, the commodities trading market has expanded in a big way. Three national commodities exchange have sprung
up since then. The National Commodities and Derivatives Exchange (NCDEX) is promoted by ICICI Bank, LIC, NABARD and PNB. It
presently facilitates trading in 15 commodities. Unfolding the complicities surrounding commodities investing, P.H. Ravikumar, MD &
CEO of NCDEX, shares his thoughts with BW's Rachna Monga as to how can investors participate in the sector..

• How should retail investors go about investing in commodities or commodities futures? What could be the
associated risks vis-à-vis investing in stocks, and which they should be aware of?

As in case of other financial markets, trading in commodities has similar inherent risks. Therefore, retail investors must
understand these risks before venturing into trading in commodities. For someone used to trading on other financial markets,
there are a lot of similarities. Again, as in case of other financial instruments, price movements as a rule cannot be predicted
with accuracy. The nuances of each segment must be well understood by the retail investors. We suggest that they undergo
the awareness programmes that the national level exchanges hold or the regulators hold in this regard.

Retail investors would need to approach a member of NCDEX in order to access the commodity futures markets. They could
theoretically become members themselves in case they are high net worth individuals, and intend to undertake large volume
trading. Normally, however, at the retail level, initial participation on the commodity exchange platforms through a member of
repute is recommended. Once sufficient experience and confidence are garnered, direct participation can be considered if felt
necessary. Also, since the commodity markets are at a nascent stage of evolution, it is in the interest of retail investors to
select exchanges - particularly national level exchanges - after looking at their risk management systems, margining
approaches (gross margining is a global best practice), settlement guarantee fund size and liquidity in the contracts for ease of
entry and exist. As the term 'commodity futures' indicates, a retail investor is taking a position on a future price which may or
may not be favourable at the time of expiration of the contract. To that extent, there is a risk of price movement as in case of
other financial futures. As in case of financial derivatives, these prices are dynamic and change by the minute. One can take
opposite positions in the same contract and move out when the going is not favourable.

• What is the cost involved here vis-à-vis the cost in buying shares/stocks?

The cost of investing in commodity futures would depend on the exchange fees charged on the transactions. But, what is
important is that the margins that you need to put upfront for taking a position on the commodity exchanges are normally much
lower than those on stock markets, though where prices are volatile these could be at same level or even higher. Such
instances are rather infrequent. In fact, they [margins] vary between 5-10 per cent on an average for commodities, which is
lower than the 20-30 per cent margins in the equity segment. Therefore, the kind of leverage that you can get from this
segment is much higher, which really reduces your cost substantially.

Where the participation is through a member of the exchange, the costs essentially would be as agreed to between the retail
participant and the member of the exchange. Already competitive pressures are ensuring that these are not far different from
those prevalent in the stock markets. Of course, retail participants would need at the minimum an internet connection, and
would have the related costs, apart from the margins and mark-to-market pay out outlays, very much like in the case of stock

• Apart from providing a trading platform, does NCDEX take initiatives to spread awareness and knowledge about
investing in commodities? How can prospective investors decide which commodities to invest?

NCDEX has been carrying out elaborate awareness programmes all over the country to educate the people on the usefulness
of commodity exchanges, the processes involved for trading, theoretical concepts, and the opportunities that exist in this

We have already conducted between 75-100 programmes in this financial year so far, covering 5,000 participants, and are
targeting 200 programmes by the end of the year to cover 10,000 participants. Retail investors can leave messages on our
website (www.ncdex.com) so that whenever there are awareness programmes in their hinterland, we can send them
intimation. These programmes span the trading community: farmers, education institutes, banks and financial institutions, etc.
And they are conducted mostly in the vernacular medium to connect with the masses. While we do explain the opportunities
and processes, as an Exchange, we do not think it right to guide potential traders on which options to exercise on our platform.
We provide the tools and the products, but it is for you as an investor to take decisions.

• NCDEX recently recorded highest ever-trading volumes in some commodities. Does this sharp rise indicate that
commodities trading is finally taking off in a big way?

Yes, the rising volumes are a vindication of the bold step taken by the Government of India to open up the commodity markets
by lifting the ban which had been in force for over four decades now. We are seeing traditional commodity brokers moving in a
big way to the NCDEX platform, and also a large shift away from the informal/illegal markets to our platforms. We have also
been observing equity brokers taking keen interest in commodities, given that commodities constitute around 45 per cent of
our GDP and commodity futures have the potential to rise to over 2-3 times the size of our GDP, which is Rs 25,00,000 crore

In FY04 volumes were in the order of Rs 130-140,000 crore and these are set to multiply three-fold at the minimum. The
challenge for an Exchange like us is to provide ease of access at low costs and to provide credible and transparent prices. So,
you can see the vast unexplored and untapped potential in this market is being harnessed, and the work has just begun.

• Are there any regulatory hurdles for commodities trading as far as retail investors are concerned?

There are really no regulatory hurdles in the way of the retail investor taking part in this market and as mentioned earlier, one
only has to connect with a member who has the infrastructure ready to facilitate such transactions. Insofar as operating
environment is concerned, there are certain legal and regulatory issues which have been taken up by us with the concerned
authorities. Resolving these will, I believe, lead to an exponential growth of this market.

In the area of physical handling of commodities, there are issues like credible warehousing infrastructure, robust grading and
assaying standards, and electronic commodity balances being held in banks accounts (akin to demat of securities), which are
all being addressed by us.

• Mutual funds are the simplest and most convenient route to start investing. How soon do you think we can have
commodities-based mutual funds in India?

There is a strong conviction among mutual funds that there is need to move into commodities to diversify their portfolio and
deliver better returns to investors. In fact, our own internal study shows that a portfolio divided between equity and gold or
silver delivers higher risk-adjusted returns, which really means that it makes sense to hold on to a portfolio which has both
equities and commodities, in particular, gold. We are pursuing the authorities to allow mutual funds to diversify into
commodities so as to provide them with larger options. Since mutual funds are understood by retailers easily, this could be the
starting point for retail interest in commodity futures, provided, of course, that we have the enabling changes in place.

• Keeping in mind the global factors, what is the outlook for commodity prices? Which could be the commodities with
the highest potential for appreciation from investment point of view?

The good thing about commodity prices is that you can conjecture movements once you have macro data available with you
on crop output within the country as well as in other countries. Crop failure of soya in the USA will have a positive impact on
domestic prices, while a good output of palm oil in Malaysia can have a soothing effect within the country. Gold prices are
determined entirely by global price movements, which is a function of the movements in exchange rates. Hence, there is
reason to believe that it is easier to track commodity prices by following the developments taking place within and outside the
country closley. Therefore, you only need to track these developments to take an informed view

• Lastly, have you yourself been investing in commodities? How much proportion of assets do you think should one

Answer: No, our exchange rules do not allow any of our colleagues and their families to invest in commodities given that we
need to maintain the sanctity of the principles of corporate governance laid down in our rules and regulation. But, I do feel that
individuals would have a lot to gain by trading in commodities. Just as you could hold savings in bank deposits or demat
shares, you can also hold on to demat account of commodities like wheat and castor- a unique system which NCDEX has
developed allows such holdings! In fact, the day is not far off when one's wealth would also include these demat balance