Commodity trades up a third as equity wilts

Volumes on the five national and 16 regional commodity exchanges in the country rose significantly in 2011 as traders turned to the equity market’s more cost-effective cousin.

According to data from commodity market regulator Forward Markets Commission (FMC), the aggregate average daily turnover of the 21 commodity exchanges rose 37% from Rs46,189 crore in January 2011 to Rs63,377 crore during the first 15 days of December 2011.

The equity markets, on the other hand, saw their combined average daily turnover drop nearly 7% from Rs158,951 crore in January 2011 to Rs148,402 crore in December 2011. The fall, in fact, was much sharper in the cash segment — down 35% from Rs16,859 crore in January to Rs11,010 crore in December.

“Commodities could have been viewed as something of a relative safe haven compared to equities, perhaps helped by a belief that the commodity market cycle is longer,” said Dr Chiragra Chakrabarty, director, financial advisory, Deloitte in India.

Others attribute the spike in volumes to better performance of select commodities.

The BSE Sensex, whose movements are said to be representative of the broader equity market, declined 24.64% over 2011.
However, gold rose 31.65% during the year and silver gained 8.37%.

Among other things, lower transaction costs in the segment have helped.

“In equities, there is STT (securities transaction tax), stamp duty and a lot of other charges. Lower transaction costs favour commodity markets,” said Gopal K Agarwal, managing director, Vogue Commercial Co.

NC Maheshwari, chairman of Farsight Securities, sees easier margins also contributing to volumes.

“A combination of lower transaction costs and lesser margins make commodity markets very attractive. Margins can be as low as 7-8% in commodities,” he said.

Both Maheshwari and Agarwal are executive members of the Association of National Exchange Members of India, or ANMI, an industry body for brokerages that has been lobbying for removal of STT in equities.

The tax can range between 0.017% and 0.125% of the value of the trade.

It is because of such charges that a Rs1 crore transaction, which costs less than Rs1,000 in total transaction costs in the commodities market, costs in excess of Rs20,000 in equities, said Maheshwari.

“So it will be no surprise if commodity turnover continues to grow at 20-30% in the new year.”

Indeed, the daily trading activity in commodities hit a high of Rs75,965 crore in September last year, with bullion contributing the bulk of the volumes.

According to an FMC bulletin on the commodity markets issued for the quarter ended September, the total value of trade was Rs54.32 lakh crore as against Rs27.17 lakh crore during the corresponding period last year.

Of this, Rs34.64 lakh crore was from trade in bullion.