Role of Commodity Market In India
Commodity markets have been around for several years now. However, it was only in 2003 that the regulators permitted exchange-traded mechanism. An essential part of the economy, commodity markets today perform several crucial roles. Here’s a quick overview to help you understand the subject better:
Helps in portfolio diversification: The new-age investor is intelligent and on the constant lookout for attractive investment avenues to diversify his portfolio. However, traditional instruments such as equities, FDs, mutual funds, and gold continue to be the top choice for many. Commodity trading provides an excellent opportunity to all investors to explore a new category of assets that includes agricultural products, metals, livestock, and bullion.
Distributes the risk: The commodity market plays a vital role in minimising the risk that investors usually face. In fact, commodities can be used as hedging instruments as the risk is distributed between a large group of investors. For example, a jewellery manufacturer who is keen to hedge against the price volatility of gold can buy gold futures to lock in the price.
Increases investment in the agri sector: Due to the shortage of strong post-harvest infrastructure, lots of food grains get spoiled. This has a direct impact on the prices which affects both farmers and end-consumers. Thanks to a viable commodity market, it becomes more profitable for farmers, brokers and the middlemen, leading to more investments for the agricultural ecosystem. The investments can be utilised to ensure better warehousing and transport facilities.
Results in predictable pricing: Certain commodities are extremely elastic, and the manufacturers need to ensure stability to protect their market share. Commodity futures can play a critical role in providing more predictability in the prices. In the absence of a commodity market, the manufacturer may face severe short-term price movements.
Leads to better aggregation and financing in the agri sector: Organised commodity markets ensure an effective aggregation of agricultural products. Farmers also benefit from the institutional mechanism provided by this market to raise financing and reduces their dependence on the unorganised sector. The sale of agricultural products also takes place in a streamlined fashion due to such markets.
Reduces speculative excess: Speculative demand for commodities such as gold is extremely high. In fact, the demand for gold is often generated for speculative purposes, resulting in high imports and utilisation of foreign exchange resources. However, there are no corresponding benefits of such a speculative demand. With a strong gold commodity market in place it will be easier to absorb the speculative demand and safeguard forex resources.
Though the commodity markets are still in their infancy, the role of commodity market in India cannot be underestimated. Commodity trading plays a crucial role in regulating price discovery and hedging price risk to safeguard the investor.
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