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Commodity Market: Post Budget Analysis

Commodity Market - Post Budget Analysis

The world of commodities is truly a fascinating one. The market tends to surprise each participant on a daily basis as far as fluctuating prices of commodities are concerned. Be it a trader, speculator or an arbitrager everybody wants to maximize his or her gains by predicting the accurate price of the commodities.

Trade concerning commodities has become an excellent avenue for people who wish to diversify their investment portfolio. Earlier, investors preferred to invest only in stocks, mutual funds or real estate. But, with the tremendous opportunity that came in the form of commodities, people have realized the potential of this market and since it is currently at a nascent stage in India, it provides an impetus to market participants to get started as early as possible to maximize their gains.

 

Earlier, there were challenges related to commodity trading in India but now with the setting up of four dedicated exchanges, trading has become very easy for retail investors too. They are National Commodity and Derivative Exchange (NCDEX), National Multi Commodity Exchange of India Ltd (NMCE), National Board of Trade (NBOT)and the Multi Commodity Exchange of India Ltd (MCX). They are regulated by the Forward Markets Commission.

Some of the most important commodities that are traded in the commodity market are as follows:

  • Gold
  • Silver
  • Cotton
  • Crude Palm Oil
  • RBD Palmolein
  • Soybean
  • Rapeseed
  • Soy Oil
  • Rapeseed Oil

In 2012, the world economy was plagued with the Eurozone crisis, Chinese economy slowdown and back home, we faced the issue of a struggling rupee. Commodities, however since the past few years have caught the attention of the investors due to easy monetary policies, investment demand and central banks of countries offering various stimulus packages.

Commodities market in India has witnessed very good volumes post 2007 – 2008 and an increase in investment demand. It also experienced a rally in prices due to economic recession and ease in monetary policies by the Federal Reserve and the Chinese Central Bank in 2009. At a time when equities were experiencing a dip in volumes, commodities saw an increase in the volumes. Unfortunately, after experiencing a steady growth in volumes since the past five years, the market is witnessing a slowdown. The period between April’12 to January’13 has not shown any incremental volumes on MCX and NCDEX and that is a cause of concern.

Union Budget 2013-14 Announcements and its impact on Commodity Markets

The most important announcement for the market in the recent budget was the introduction of the Commodity Transaction Tax (CTT) of Rs 10 per lakh on non agri commodities.

Analysis

Of the total turnover that takes place on Indian commodity exchanges, 88 % is accounted by non agri commodities. CTT is to be paid by the seller and currently, one transaction in non-agri commodity trading attracts around Rs 350 per

Crore (around Rs 250 Transaction Tax and Rs 100 Stamp Duty) at one end. With CTT at Rs 10 per lakh, the transaction cost for a seller will shoot upto Rs 1,350!  One can well imagine the impact this will have on the volumes in the market. The biggest hit will be taken by jobbers and arbitragers. With this kind of an impact in costs, the liquidity in the market is bound to be affected.

The only consolation one can take from this announcement is that trading in commodity derivatives will not be considered as a ‘speculative transaction’. Also, if the earnings from such transactions form a part of business income, then CTT shall be allowed as deduction. If the government provides more clarity on this subject, then it will certainly attract corporates to the commodity markets.

Some other important commodity related announcements in the budget are as follows:

  • Silver manufactured from smelting zinc or lead will attract 4 % excise duty
  • Allocation of Rs 500 crore for diversification of crops
  • In its endeavor to enhance livestock productivity, the government will allocate Rs 307 crore for setting up National Livestock Mission
  • Additional Rs 10,000 crore allotted to National Food Security Bill, to be passed in Parliament
  • Allocation of Rs 9954 crore to Rashtriya Krishi Vikas Yojana
  • Setting up of textile parks under the Scheme for Integrated Textile Parks (SITP)
  • The Handloom sector also received an impetus in the form of availability of working capital and term loans at an attractive interest rate of 6 %
  • Increase in the duty on raw silk from 5 % to 15 %
  • Exemption provided on excise duty on handmade carpets and textile floor coverings of coir or jute
  • Duty free gold items that can be bought by individual men raised to Rs 50,000 and for women, it was raised to Rs 10,000
  • Reduction of customs duty from 10 % to 2 % on pre-forms of precious and semi-precious stones

Conclusively, none of the above mentioned budget announcements will have a major impact on the moving commodity prices but introduction of CTT is bound to impact the volumes in times to come.

 

Summary:

Kotak Commodity Services Ltd is a leading commodity broking firm offering online commodity trading service’s along with a research division specializing in fundamental & technical research. We also keep you updated by providing news on prices of various commodities that are being traded. For more information visit www.kotakcommodities.com

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