How does the Commodity Market Work in India

Last Updated: 4 Feb 2025

One of the most interesting things to understand is how the commodity market works. When we talk of the working commodity market, we must understand that there are two distinct markets viz. the spot market and the derivatives market. The spot market is a market for delivery of commodities on spot or that is normally 4-5 days. The futures markets will be delivered after a specific period; normally 1 month, 2 months, or 3 months. The working of commodity markets in India is basically about the futures market but the spot market is equally important.

How does the commodity market work in spot and futures? The spot market is controlled by specific states and does not come under SEBI purview. It is only the commodity futures, and that too the exchange-traded futures, that come under SEBI purview. There is still a thriving commodity forward market that is on an OTC basis and where contracts are customized to the specific requirements of the individual parties. So in a nutshell; there is the commodity spot market, the commodity forwards market, and the commodity futures market with SEBI regulating only the third aspect of commodities.

Commodity Market Work in India

Commodities trading was permitted in India in 2001, with the Multi Commodity Exchange (MCX) and the National Commodity and Derivatives Exchange (NCDEX) starting operations in 2002. Initially, only select commodities experienced sharp increases in trading volumes. The commodity exchanges initially offered futures contracts, which involved both speculation-based and delivery-based trading. This meant that the exchanges had agreements with warehouses to provide the underlying commodities at an assured price to the trading parties, while the exchanges themselves acted merely as facilitating platforms, with the risk borne by the traders.

Regulation of the commodity markets was initially under the Forward Markets Commission (FMC) until 2015. However, following the National Spot Exchange Limited (NSEL) scam in 2013, there was significant scrutiny of the FMC’s functioning. As a result, the regulation of the commodity futures market was transferred to the Securities and Exchange Board of India (SEBI) in 2015. SEBI has since been responsible for ensuring standard agreements for trades, covering quality, lot sizes, delivery dates, and expiries to facilitate smooth trading.

The trading of commodity options was introduced in 2017, though it has not yet gained significant traction despite showing promise in several commodities. In India, the majority of trading volumes in options pertain to options on commodity futures rather than spot commodities, which distinguishes the Indian context of trading options from other markets.

Classifications of Commodity Futures Trading in India

In India, there are broadly 4 categorizations of commodity futures.

• Commodity futures on Precious Metals include gold and silver futures contracts on the commodity exchanges. These contracts are extremely liquid and MCX has a leadership position in futures and options on precious metals.
• Commodity future on Base Metals or Industrial Metals includes factory commodities like futures contracts on copper, zinc, aluminum, etc on the commodity exchanges. These contracts are also extremely liquid and MCX has a leadership position in futures and options on these base or industrial metals.
• Commodity futures on precious metals include commodities like futures contracts on gold and silver on the commodity exchanges. Both the gold and silver contracts are among the most liquid contracts in the exchanges and MCX once again has a leadership position in futures and options on these precious metals.
• Commodity futures on agriculture commodities include essentially cash crops like cotton, guar, guar gum, palm oil, etc. These contracts are also extremely liquid and it is NCDEX that has a leadership position in futures and options on these agricultural commodities.

In India, many of the contracts are not permitted like many of the food crops are not allowed to be traded in commodity futures due to fears that they could lead to unnecessary speculation and price rise.

How do commodity futures help?

While speculating on price is surely one advantage of these commodity futures, another very important aspect of commodity futures is to hedge risk. For example, a company that needs to procure copper throughout the year and expects prices to rise can hedge risk by purchasing copper futures. Similarly, a copper miner and smelter can sell copper futures in the commodity market to lock in the selling prices. In both cases, they may lose out if the price moves in their favor but the commodity futures lock in prices and give greater certainty to the business. That is the key application of these commodity futures.

One of the best ways to invest in commodities is via the futures contract route, especially the exchange-traded commodity futures. It represents an agreement to buy or sell a specific quantity of a commodity at a set price at a future date. Such contracts can be for delivery or purely speculative for playing the expected price movement. Futures are available in most commodity categories. Traders use these contracts as protection from the risks associated with the price swing of an underlying finished product or raw material. Trading in commodities involves a high amount of risk for amateur investors since the levels of knowledge of the commodity and global trends are a must.

Major Commodities Exchange in India

There are 6 major commodity trading exchanges in India as listed below.

1. Multi Commodity Exchange – MCX. This was founded by Financial Technologies almost 20 years ago and has a leadership position in commodity futures on base metals, precious metals, and energy.
2. National Commodity and Derivatives Exchange – NCDEX is also around 20 years old and while it also offers most of the commodity futures for trading, it has a leadership position in trading agricultural commodities
3. National Multi Commodity Exchange – NMCE
4. Indian Commodity Exchange – ICEX
5. Ace Derivatives Exchange – ACE
6. The Universal Commodity Exchange – UCX

In addition to the above, the NSE and the BSE have also been authorized to offer trading in commodities by SEBI, although it will be in a phased manner. That is yet to pick up meaningfully.

Are Commodities a Good Investment?

First and foremost, commodities are not an investment. They can either be seen as a play on the future price movements of these commodities or they can be seen as a hedge. The hedge entails protection against price risk when you have an underlying risk involved like a warehouser, wholesaler, or manufacturer of any of these commodities.

Frequently Asked Questions

Q1.What are the commodity products?

Commodities are basic products that are undifferentiated. For example, gold is a commodity, gold ornaments are not. Silver is a commodity but silver used in electronics is not a commodity. These commodities can be differentiated and are normally see their price being driven by the factors of demand and supply.

Q2.What Are Some Examples of Commodities?

You have precious metals like gold and silver. Then there are industrial commodities like copper, zinc, aluminium etc. Then there are energy commodities which include crude oil and natural gas. Finally, there are agricultural commodities like cotton, guar, palm oil etc.

Q3.What Do Commodities Traders Do?

Commodity traders can be speculators, hedgers or even arbitrageurs. Normally, arbitrageurs work on the narrow spread between the spot market and the futures market. They also help make market by constant liquidity infusions.

Q4.Is there any minimum capital required for commodity trading?

No, there is no minimum capital required for commodity futures trading. You can start with any amount based on your risk appetite and the specific commodity you wish to trade.

Q5.Which commodity is more profitable?

The profitability of commodity futures varies, but historically, crude oil and natural gas have been among the most profitable due to their high demand and price volatility.