India commodity markets witnessed unprecendented volatility in recent times with guar seed, guar gum prices, especially, doubling its prices since November 2011. Pepper, potato and Chana also witnessed volatility from time to time in 2011 at National Commodities and Derivatives Exchange.
Venkateswaran Karikar, AVP, Commodities Research at India Infoline Ltd(IIFL) feels that managing intra-day volatilities is a daunting task for the market regulator, Forward Markets Commission. As Imposing higher margins haven’t help curb volatility, Venkateswaran Karikar in conversation with Sreekumar Raghavan of Commodity Online, suggests segregation of traders into various categories as is being done in USA and impose separate limits for them. Excerpts from the interview:
Sreekumar Raghavan: Indian commodity markets have witnessed unprecedented volatility and several measures taken haven’t succeeded in curbing it? What more needs to be done?
Venkateswaran Karikar: In the present Indian context, I would say it is very difficult to manage intra-day volatility. Imposing higher margins will not work as cash rich participants continue to pour money into speculative trading and the market is not benefitting at all from these measures. There is a fundamental flaw in the classification of traders in India—we don’t classify traders at commercial, non-commercial, or as speculators, hedgers as is being done in USA and other markets.
Once we implement this classification- as small traders, big institutional traders, hedgers and speculators and impose margins and position limits accordingly, true price discovery function of the market would take place. In the 1990’s India’s equity market also witnessed speculative trading and high volatility but they have been curbed now. There should be larger integration between FMC and equity regulator SEBI for effective regulation of fund flows and
SK: Do you welcome the suggestion to allow banks and mutual funds to trade in commodity futures?
VK: The entry of banks and mutual funds may help create more trading volumes but lot of reform measures have to be implemented by the regulator including proper classification of traders to ensure that volatility is curbed and the market does its function of price discovery in a proper manner.
SK: IIFL had come out with an outlook on commodities at the beginning of the year, do you think the outlook still holds good now or what are the new trends emerging as we move into February?
VK: The key factor to look out for is the Rupee depreciation. I feel Rupee depreciation could happen again as it has moved in a wider range from 44 to 54 and has seen a correction. But from the macro-economic point of view, the GDP is forecast to fall to 6.5% to 7% and therefore in the next to four to six months rupee may take a new low as industrial production is also not encouraging. This is going to affect the base metals and precious metals complex. In copper we are seeing a consolidating market rather than a trending market. Weak China demand has also impacted copper prices.
SK: What about agri-commodities, do you expect major outperformers?
VK: In agri-commodities, pepper has lost its sheen while cardamom, chilli and tuermic are attractive long term buys while Chana has potential for upside movements soon. We would not give a buy call on pepper for the time being but would advise sell on rallies and buy on dips. In the case of oil seeds, fundamentals from Malaysia, US market are a bit bearish. There are more soybean stocks in US at 275 mn tonnes while Malaysia has crude palm oil stocks above 2 mn tonnes.
