Too early to think of an India Commodity Index

Why India is not having a commodity index that is representative of the commodity market sentiments in the country? It is textbook knowledge that India is a major producer, processor and consumer of commodities across segments, making such an index a necessity.

For instance, Reuters Jeffrey CRB Index is a global benchmark when it comes to commodities and is widely quoted in the media. But NCDEX Dhaanya, or MCXCOMDEX is not that popular; neither they are quoted in media or referred to by experts. Why?

That set us thinking and we probed it further. We posed the query to the heads of three prime commodity exchanges in India.

This was the query:

“Given that MCX indices and NCDEX index Dhaanya, on a standalone basis, do not reflect the Indian commodity market sentiments; is time ripe to introduce a commodity index that reflects Indian market sentiments in a holistic manner? An Indian version of Thomson Reuters/Jefferies CRB Index; only that it reflects Indian market sentiments in a better and complete way.”

And this was their response:

Lamon Rutten, MD & CEO, MCX

"At present, on India's commodities futures markets, key energy commodities (e.g., electricity, coal) are not traded, and agricultural futures trade is still in a nascent stage of development. As indices can be calculated only on the basis of frequent (at least daily) and reliable data, and such data are scarce for the Indian commodity sector, exchanges have to do the best they can with the available data. A truly representative index will become possible only when all of the commodities that are important for India can be actively traded on futures markets."

Anil Mishra; CEO, NMCE

“I don’t think so...” said Anil Mishra, responding to the question of whether time is ripe for a commodity index that would completely capture India commodity market sentiments.

“The Indian commodity markets are not mature enough. When it comes to the index, how will you determine weight for a commodity when it is experiencing volatility and markets participants keep switching from one commodity to the next pursuing liquidity?” he asked.

R.Ramaseshan; MD & CEO, NCDEX

“It is not correct to contend that Dhanya does not reflect Indian commodity market. The index as designed by NCDEX is representative of the Indian market, as it comprises contracts where price discovery takes place in the country.”

Analysts in brokerages seemed to endorse the views of Rutten and Mishra.

“The commodity index as introduced by NCDEX back in 2003 is still at a nascent stage. Further, the indexes are not tradable and hence do not attract investor interest. Representativeness of indices with regard to market sentiments is also a question.” said Anand James, Research Head, Geojit Comtrade, Kochi. However he said that he had actually come across many instances where the exchange index was quoted on certain occasions.

One of them was critical of NCDEX Dhaanya:

“I suspect if the NCDEX is doing enough to promote Dhaanya. When it comes to equity indexes like Nifty, they have an index committee and all. They(NSE) also put in the necessary efforts to promote the index and even brand it...such an effort is lacking when it comes to NCDEX, it seems...” said a brokerage research head.

The question of representation is a major factor affecting commodity indexes. Every commodity have a distinct nature and associated factors guiding them among many other things like seasons, supplies, demand, and regulation.

“Suppose a person is trading in soy. Why should he or she follow an index which represents more of spice movements or other commodities...” asks Anand James.

Reuters Jeffrey CRB Index is a global index and follows global scales closely, experts argue. It is not a polarised index: an index where certain commodities have excessive weightage. In short, Reuters Jeffrey CRB Index is representative of global commodity movements and is sufficiently mature.

Additionally, the commodity markets are more focused. Investors trade in certain commodities they are familiar with. Diversity in commodity portfolio is not comparable with portfolios of equity market players.

As published in: http://www.commodityonline.com/news/Too-early-to-think-of-an-India-Commodity-Index-39946-3-1.html