Mumbai, March 2011

Volumes on India's commodity exchanges could jump 20 percent in the year to March 2012, as banks and foreign institutions start trading and mini-contracts attract farmers to take part, the market regulator said. Legislation to allow banks and foreign players onto India's markets should be cleared in July 2011, B.C. Khatua, head of the Forward Markets Commission (FMC), told Reuters in an interview late on Wednesday. The bill, which will also give the FMC more powers and allow options trade, has been referred to a standing committee before going to India's parliament for approval.

"We have received a positive feedback from the standing committee, and they are sympathetic to the urgency of the need of the passage of the bill," Khatua said. The seven-year-old commodity futures markets in India, the world's second-largest producer of wheat and rice and the biggest buyer of bullion, draws a majority of small retail participants, keeping liquidity low and crimping the ability of corporate players to hedge price risk.

After parliament passes the bill, the regulator will have to seek clearance from the finance ministry to allow banks and foreign players into the commodity markets.

Khatua said foreign players would be allowed in a phased manner given the sensitivity of commodity markets to the economy of the country, one of the largest producers and consumers of sugar and rice in the world.

"I would certainly like my market to have more liquidity and depth, but not at the cost of causing instability in the commodities market. I would rather be conservative rather than bullish and be sorry," said Khatua.

India currently has five national level commodities exchanges and volume traded was 1.03 billion tonnes from April 2010 to January 2011. "I do expect significant growth in coming quarters, with two new exchanges running, they would also be trying to ramp-up volumes," said Khatua.

The exchange promoted by Kotak Group, ACE Derivatives and Commodity Exchange, and Indian Commodity Exchange, promoted by the country's biggest bullion importer, MMTC , started operations in October 2010 and November 2009 respectively.

In late January, the regulator allowed commodity exchanges to start the world's first iron ore futures contracts, and analysts expect liquidity to get a boost after options are allowed.

The commodity markets would get more liquidity and entice corporate participation after banks, which import about 80 percent of bullion, and financial institutions are allowed. India's commodity futures volumes are miniscule compared with China, as the country restricts participation of banks and foreign players, considered vital in bringing large volumes to bourses.

China's commodity exchanges had turnover of nearly $35 trillion in 2010, while India's turnover stood below $5 trillion.

Comparison of exchange volumes of India and China

Khatua said there were structural constraints on the supply side due to lack of adequate logistics, seed management and post-harvest marketing, making the task of the regulator difficult in managing price volatility.

"The struggle for us is to bring participants to the market, the challenge for us to how to discover today's spot prices, with so much fiscal disparity among states," Khatua said. India's states have varying levels of taxation and legislation to overhaul and streamline the system is planned.

Traders say it is convenient for Vietnam to buy corn and soymeal from India as the latter typically supplies in small lots, unlike Brazil and Argentina that export in large panamax vessels. Feed millers from Vietnam were in talks this week to buy some 60,000 tonnes of corn from Argentina but the deal could not be concluded as buyers cited higher prices, regional traders said.

Mehta said Indian suppliers had been forced to pay "very high" demurrage costs for their vessels stranded at Vietnamese ports. It's been more than a month since Vietnam rejected Indian cargoes totalling 50,000 tonnes, with demurrage costs estimated at $450,000.

"With very high demurrage costs, no Indian trader is willing to export to Vietnam. One must realise that no other importer, including China, Japan and Korea has complained about the quality," Mehta said.

Ends --

By Siddesh Mayenkar, Reuters - for Commodities Now