Informist, Wednesday, Dec 13, 2023
--NCDEX CEO: Exchange needs to diversify further in non-agri segment
--CONTEXT: NCDEX MD Arun Raste's remarks in interview with Informist
--NCDEX CEO: Will seek SEBI nod to let FPIs trade in agri commodities
--NCDEX CEO: Plan to launch 1-2 non-agri commodity futures by Mar
--NCDEX CEO: Exchange working on carbon futures contracts
--NCDEX CEO: Exchange's agri basket shrank 70% with SEBI futures ban
--NCDEX CEO: Not many aware of returns on investments in commodities
--NCDEX CEO: Govt may soon announce subvention on post-harvest credit
--[I] NCDEX CEO: Exchange pushed for subvention on post-harvest credit
--[I] NCDEX CEO: Sunflower oil futures contracts a success
By Abhijit Doshi, Sayantan Sarkar, and Afra Abubacker
MUMBAI – The National Commodity and Derivatives Exchange is looking to diversify its product base by foraying into more non-agri commodities, Arun Raste, managing director and chief executive officer, tells Informist.
"When I was appointed to NCDEX, I realised... NCDEX needed to diversify into the non-agri segment more, which would cushion the exchange from the vagaries of nature or government policies," he says in an interview.
Raste says NCDEX is working on new products such as carbon futures. Additionally, NCDEX is likely to launch one or two more non-agri commodities for trading on its platform before March, he says.
"When seven (agricultural) commodities were banned in 2021, 70% of NCDEX's business was wiped out, and we were left with only 30%," says the chief executive officer. "Unless the ban is lifted, my agri basket is not full."
The Securities and Exchange Board of India in October extended the suspension of futures trading in derivative contracts of paddy (non-basmati), wheat, chana, mustard seed and its derivatives, soybean and its derivatives, crude palm oil, and moong till Dec 20, 2024.
On the participation of foreign portfolio investors in commodity derivatives, Raste says that at the next meeting of SEBI's Commodity Derivatives Advisory Committee, members will urge the market regulator to allow FPIs to trade in agricultural commodity derivatives too.
In June 2022, SEBI allowed FPIs to trade in the commodity derivatives listed on local exchanges. They were, however, only allowed to trade in non-agricultural commodities which are cash-settled contracts, including certain non-agricultural derivatives indices. Non-agricultural commodity contracts include gold, silver, crude oil, and copper and other base metals.
The following are edited excerpts from the interview:
Q. NCDEX completes 20 years of operation on Friday. How has the journey been?
A. When I see it in retrospect, the two commodity exchanges, NCDEX and MCX, did not have watertight differentiation between agri and non-agri commodities. NCDEX used to have both agri and non-agri segments. But, over the years, NCDEX has been more into agricultural commodities, while MCX is into non-agri.
The agricultural sector has its own peculiarities and vulnerabilities. Unlike equity shares, agri commodities have a shelf life of only six months to maximum two-three years. So, commodities are not perpetual like equities. There is a churn every three months or six months. Therefore, you cannot compare the equity market with the commodity market.
Also, the supply chain in the agri sector is not well established. The country did not have warehousing infrastructure for agriculture. It's only in the past 20 years that NCDEX has started building warehouses with the help of NABARD (National Bank for Agriculture and Rural Development). We also formed a subsidiary called NERL (National E-Repository Ltd), which issues warehouse receipts for commodities in electronic form.
Previously, banks majorly gave production credit, and not many provided post-harvest credit with subvention. Production credit is cheap as it is under the Kisan Credit Card scheme and has subvention in interest. NCDEX did tie-ups with a lot of banks for post-harvest credit as warehousing is a major post-harvest expense for farmers. Fortunately, with NCDEX's efforts, in another month or so the Centre is likely to announce the same interest subvention for post-harvest credit.
NCDEX as an exchange has also played a vital role in the standardisation of agricultural goods. Unlike non-agri, every morsel of agricultural goods is different in size, shape, colour, and moisture content. So, when we devise a contract for a particular commodity, the Product Advisory Committee of the exchange checks the whole value chain and comes to a conclusion of what is the standard and that becomes a sort of norm for our contract.
Additionally, we didn't have an assaying facility in the country, but over the last 20 years we have built a system. I wouldn't say we have done a great job. But these are some things which we were totally missing back then, and today, because of the exchange's efforts, these things have come into play.
Q. Do you have assaying facilities in the Agricultural Produce Marketing Committees?
A. No, not in APMCs. We only have assaying facilities at our warehouses.
Q. Volumes are increasing in non-agri commodities. But NCDEX is mainly in farm commodities where delivery is mandatory. How do you address this imbalance?
A. When I was appointed to NCDEX, I realised that there was a need for diversification. NCDEX needed to diversify into the non-agri segment more, which would cushion the exchange from the vagaries of nature or government policies. So we launched steel futures, because it is a large commodity. And if steel works, we'll get into other non-agricultural commodities.
When the seven commodities were banned in 2021, 70% of NCDEX's business was wiped out, and we were left with only 30%. Unless the ban is lifted, my agri basket is not full.
Q. How has the ban affected the derivatives market?
A. After joining NCDEX in 2021, I visited the soybean belt in Madhya Pradesh and met a farmer who told me that in June, he checks the news to see if the monsoon has reached Kerala. The second thing he does is check the futures price of soybean. If the futures price is better than in the past couple of years, and the monsoon is okay, the farmer decides to sow more soybean.
So, a farmer usually looks at the futures prices to understand if it would be beneficial to sow soybean. When the ban on these seven commodities took place, about 150 farmer producer organisations urged the government not to ban the futures trade in soybean. So, this is the impact on farmers and at the ground level.
The other effect is at the corporate level. Chief executive officers of two companies have said, which is already in the media, that as there was no hedging mechanism available to them in India for these seven commodities, the companies incurred losses of 700-800 mln rupees. This is the impact of the ban on the corporate sector.
The ban also affects the warehousing ecosystem that has been built in the last few years. If there is a ban on these commodities, the warehousing system suffers because they have no work in that case.
Q. How have the newly launched contracts such as robusta cherry coffee, sunflower oil, and isabgol performed?
A. Robusta cherry futures hasn't done well. After looking at the international market, we thought it would do well. But it hasn't picked up. Isabgol was launched at the end of the sowing season last year (isabgol is sown in the winter months in India). Even at the end of the season last year, isabgol contracts fared well. So, we will see how it does this season.
Sunflower oil has been doing well. As of today, NCDEX has about 3,000 tn of open interest in the contracts. Our target is about 5,000 tn by the end of December. Once it reaches the 5,000-tn mark, a lot of multinational companies will start investing in sunflower oil. Sunflower oil is the second-most consumed oil in the country after palm oil. It has a lot of potential.
I am happy with sunflower oil. For isabgol, once the season progresses, we will know the performance of the contracts. Robusta cherry contracts have been a flop.
Q. Why do you think SEBI has not allowed the relaunch of soybean, mustard, and crude palm oil contracts but has permitted the launch of sunflower oil?
A. It's not for me to comment. One reason could be that the price of sunflower oil is dependent on international prices. But, by that logic, crude palm oil is the same. I don't know the reasoning behind SEBI's decision.
Q. Any new commodities in the pipeline for NCDEX?
A. Carbon futures are in the pipeline. It is a work in progress. Before March, we intend to launch one or two more commodities. When the Product Advisory Committee meeting takes place, we will send the proposal to SEBI. As I said, we have to diversify, and so these commodities will be non-agri. That much I can say.
Q. Last year, foreign portfolio investors were allowed to trade only in non-agri commodity derivatives. Do you think they should be allowed in agri commodities too? How do you suggest improving the volumes and participation of FPIs in commodity derivatives?
A. We are members of SEBI's Commodity Derivatives Advisory Committee, and we deliberated on whether FPIs should be allowed in commodity derivatives. The first step was to allow FPIs in commodities, which happened last year. There is a typical (fear) of FPIs and FIIs (foreign institutional investors) that it is easy for them to run away. Before giving them any permission, we have to ensure their participation isn't fuelling untoward mishaps, either in terms of prices going up or crashing. We have to ensure safeguards for that and then permission is given.
So, the first step was to allow FPIs into commodities as part of an experiment. This is a gradual process. If the experiment is satisfactory, then they can be allowed into the agri segment too. Whenever the next meeting of SEBI's CDAC (Commodity Derivatives Advisory Committee) takes place, which should be in Mar-Apr, we will ask for approval to allow FPIs in the agri commodity derivatives segment.
Q. Are you happy with their participation in non-agri commodities so far?
A. Anybody who invests money looks for returns. Not many people are aware that there are greater returns on investments in commodities. I spoke to a few college students. I said, "One year ago, had you invested in jeera or turmeric, you would have doubled it." It would have been as good as any of the blue-chip companies. But not many people are aware of this. If you have a look at the securities firms or brokerages, they have commodity desks, but these desks have only a few who know about the segment. So, unless you have people who specialise in this and track it, they will not be in a position to derive benefits. As there is a scarcity of data, coupled with a lack of awareness, opportunities to make profits go abegging.
Q. BSE and NSE have come up with commodity futures and options contracts. How do you view this? Is it increasing competition for NCDEX?
A. NSE is a 15% shareholder, the largest, in NCDEX. So, the more the merrier, because, internationally, India hasn't even scratched the surface in commodity derivatives. So, the introduction of these new contracts will only expand the commodity derivatives market in India.
Q. Is the comparison between NCDEX and the MCX in terms of percentage of traded contracts and volumes fair as both have different sets of commodities on their platforms?
A. It is for you to project if it is fair. As I said, this is a peculiar sector with peculiar conditions which not many people understand. Earlier, we used to have a different regulator for this. The Forwards Market Commission was the regulator. Now we are part of SEBI. First we have to look at equities and commodities. Within commodities, there are agri and non-agri segments. So, comparing NCDEX with MCX, or with NSE, will be like comparing apples and oranges.
Q. A couple of months ago, NCDEX and the Maharashtra government were planning to launch options contracts for turmeric. What is the update on that?
A. We are continuing with that work. It is on track, and we will continue to work with them.
Q. What will the government's role in this be?
A. The government will subsidise "put options contracts", which farmers will buy and safeguard their crops.
Q. What is the role of banks in the agricultural sector and warehousing operations?
A. When the Warehousing Development and Regulatory Authority came into the picture, banks were ready to take warehouse receipts as collateral. Unfortunately, there were a lot of frauds related to warehouse receipts earlier. Now, at least the percentage of frauds has declined because systems are probably more scientific, and therefore, more banks are coming into the system. On Monday, National E-Repository Limited signed an agreement with the Jammu and Kashmir Bank. So, our efforts are to ensure that banks provide credit on warehouse receipts. End
Edited by Rajeev Pai
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