2

Agenda

 Overview
 Arbitrage Opportunities
 Hedging Opportunities
 Investment Opportunities
 Institutional Participation
 NCDEX

3
 Role of an Exchange
 Anonymous auction for price discovery
 Neutrality - conflict of interest avoided
 Transparent real time price dissemination
 Benchmark reference price
 Liquidity to participants
 Risk Management in a volatile market
 Robust Clearing & Settlement systems - counter party credit
risk mitigated
 Fair, safe, orderly market - rigorous financial standards and
surveillance procedures

4
 Benefits of trade on Futures Market

 Risk transfer platform from actual users to traders /

speculators
 Helps hedgers concentrate on core activity
 Long term price signals help
 Farmers to decide cropping pattern
 Corporate managers to take investment / capital expenditure
decisions
 Cover sales and raw materials risk
 Cost of Capital reduced
 A good investment option
 Arbitrage opportunities

5
 Myths about commodity exchanges
 Commodity exchanges are speculative markets not meant
for actual users
 Speculators infuse liquidity to enable hedgers to transfer their
price risk
 If commodity exchanges do not enable physical delivery,
they are then only for speculators
 Exchanges are meant for price discovery and physical
delivery is only incidental

As Exchanges gain liquidity actual users will separate hedging from physical
delivery
6
 Myths about commodity exchanges
 How can trading volume be greater than actual production
in that commodity?
 Open Interest is the only true indicator of the depth of
the market
 E.g.: Trading volume in Infosys / Reliance in the
Capital markets is a multiple of the outstanding shares
 Can an Exchange have a price view?
 Exchange is a platform for price discovery– It is only
the thermometer of the price movements and is not
responsible for the price movements

NCDEX rigorously monitors & controls level of and composition of Open interest in any
commodity
7
 Evolution of Commodity markets in India

 Ban in forward trading in mid-sixties

 Emergence of national level online multi-commodity
exchanges
 3 National level and 21 regional
 Trade in 60 commodities compared with just 8 in 2000
 Volumes of Rs 571,000 crores in 2004-05
 Volume first two months of 2005-06 reached
1,90,000 crores (800 % growth over 25,000 crores
in 2004-05)

Traded volume in 2004-05 around 20% of India’s GDP

8
 Regulatory Structure in India
Ministry of Finance Ministry of Consumer
Affairs

National Insurance Regulatory Pension Funds Regulatory Company

FMC
Housing Bank Development Authority Development Authority Law Board
(IRDA) (PFRDA)

Commodity
Housing Finance Pension
Insurance Corporates Exchanges
Companies Funds

SIDBI RBI SEBI NABARD

State Financial Banking / Capital Co-operative Banks &

Institutions NBFCs Markets Regional Rural Banks

10
 Structure of Indian Commodity Futures Exchanges

FMC

Commodity Exchanges

National Regional
exchanges exchanges

NCDEX NMCE MCX NBOT 20 Other Regional

Exchanges

11
 Growth in volumes of Indian Commodity Exchanges

Rs Crores
6 0 0 ,0 0 0

5 0 0 ,0 0 0 5 7 1 ,0 0 0

4 0 0 ,0 0 0

3 0 0 ,0 0 0

2 0 0 ,0 0 0
1 2 9 ,4 0 0
1 0 0 ,0 0 0 6 6 ,5 0 0
4 ,5 0 0
0
2 0 0 1 -0 2 2 0 0 2 -0 3 2 0 0 3 -0 4 2 0 0 4 -0 5

Impressive growth of 341 % between 2003-04 to 2004-05

12
 Volumes of Indian Commodity Exchanges

Rs Crores
M a rke t T ra d e V a lu e
M CX ,
157246, 28%

O th e rs ,
87418, 15% N CD EX ,
NBOT, 266460, 46%
50875, 9% N M CE, 9001,
2%

N CD EX NM CE NBOT O th e rs M CX

13
 Agenda

 Overview
 Arbitrage Opportunities
 Hedging Opportunities
 Investment Opportunities
 Institutional Participation
 NCDEX

14
 Arbitrage opportunities

 Law of One Price – “a commodity cannot command two

different prices in two different markets ”

 Arbitrage opportunities emerge out of pricing

inefficiencies
 Between the cash & derivatives market
 Between two futures contracts with different expiry dates
 Between two or more exchanges

15
 Arbitrage Opportunities
Annualized Returns on Contract over Spot
(in %)
June July August
Grade A parboiled 88 12 2.5
Rice
Gram 84 57 46
Urad 28 19 9
Sugar 13 3 5
Raw Jute 85 68 48
Guar Seed 25 15 13
Gold N.A. 5.8 8.3
Silver 8.5 7.3 5.9
Copper N.A. 29.5 18.3

16
 Agenda

 Overview
 Arbitrage Opportunities
 Hedging Opportunities
 Investment Opportunities
 Institutional Participation
 NCDEX

17
 Raw material intensive industry
Industry Ratio of Raw
materials/Net sales

Soyabean products 92.2

Vanaspati 89.6
Vegetable oils 88.0
Refinery products 86.2
Petroleum products 85.8
Steel wires 85.5
Gems and jewellery 84.9
Textile products 76.7
Bakery and milling 73.7
Aluminium products 73.8
Polymers 70.0
Automobiles 68.3 Source: CMIE

18
 Steel: Need for hedging mechanism
 Characterized by high volatility during the last 2 years
 Steel market expected to remain volatile
 Participants need a mechanism to reduce price risk
 Steel futures can help mitigate price risk
 Steel futures will give an indication of future trend in steel
prices

19
 Seller’s hedge - assumptions

 Price of saleable steel falls by 10% in FY02

 Steel hedged at FY01 prices
 Decrease in PBDIT solely due to fall in price of saleable
steel

20
 Seller’s Hedge
FY00 FY01 FY02 FY03 FY04

Saleable Steel 16500 18500 16600 20300 24500

Prices (Rs/Ton) (10%)
Quantity Sold 2668 2446 2731 3448 3473
(‘000 tonnes)

PBDIT 1291 1507 1179 2208 3548

(Rs Crore) (22%)

(* Saleable steel constitutes approx. 72% of sales)

If hedged completely, could have made incremental profits of

Rs 518 crores, 44% higher

21
 Buyer’s Hedge - assumptions

 Prices increase by 17% in FY04

 Prices hedged at FY03 prices
 Decrease in PBDIT is solely because of increase in raw
material component

22
 Case Study-Buyers Hedge

FY00 FY01 FY02 FY03 FY04

HR Coils Prices 13728 15736 13115 16776 19626

(Rs/Ton) (17%)

Quantity 299927 261118 265973 350807 340996

purchased
PBDIT 183.39 240.23 160.15 637.74 635.56
(1%)

The company could have saved the loss of around Rs 97 crores by hedging,
i.e. 15% higher profits

23
 Effect of Price shock
Rs crores

R a t io o f R M In c r e a s e o f 5 %
N e t S a le s R M C o s t t o N e t S a le s PBT in r a w m a t e r ia ls
S o y B e a n p ro d u c ts 6 1 0 3 .1 5600 92 98 -2 8 0
S ugar 9 6 2 0 .7 7143 74 66 -3 5 7
G e m s & J e w lle r y ( G o ld ) 8 4 6 2 .7 7150 84 99 -3 5 8
S te e l 73074 39830 54 6134 -1 9 9 1
Source: CMIE

Even an increase of 5 % in cost of raw materials could wipe out the profits of a
raw material intensive commodity

24
 Agenda

 Overview
 Arbitrage Opportunities
 Hedging Opportunities
 Investment Opportunities
 Institutional Participation
 NCDEX

25
 Conducive drivers

 Beginning of the Bull phase after 20 years of Bear market

 Escalating commodities demand from Asia, especially China
 Depreciating dollar – shift to hard currencies like Gold
 Inflationary pressures build-up
 Surging energy prices – leading to energy crisis
 Rise in commodity demand with economic recovery

26
 NCDEX Agri vs. NSE-Nifty
1350.00 2500

1300.00
2000

1250.00

1500
1200.00

1150.00
1000

1100.00

500
1050.00

1000.00 0
16-Dec-02 05-May-03 22-Sep-03 09-Feb-04 28-Jun-04 15-Nov-04 04-Apr-05

NCDEX Index NSENIfty

Correlation coefficient is 0.02

27
 Correlation: 1997-05
Co rre latio n Co e ffic ie n ts in In d ia n m a rke ts
Go ld S ilve r S to c ks Bo n d s
Go ld 1 0.55 -0.09 -0.076
S ilve r 1 -0.06 -0.015
S to c ks 1 0.112
Bo n d s 1

Data: LBMA bullion prices, NSE Nifty, NSE G-Sec Index

Benefit of diversification can be seen from the

Risk Adjusted Returns

28
 Volatility comparison – 1997-05
Average annual volatility
 Sensex or Nifty - 25-30%
 Govt Sec Index - 5-10%
 Gold - 12-18%
 Silver - 15-20%
 Cotton - 10-12%
 Oil seeds - 15-20%

 Commodities are less volatile compared to equity market, but

more volatile as compared to G-Sec’s

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 Portfolio diversification & value investing

 Low co-relation between stocks/bonds and the

commodities market
 Better diversification of portfolio
 Commodity markets are less risky compared with stock
market.
 Reduces risks in a diversified portfolio

30
 Risk-Adjusted Returns:1997-05
Ab s Cum ula tiv e Ris k o f Ris k Ad jus te d
Po rtfo lio s tru c tu re Re turns p o rtfo lio Re tu rn
100% S to c k Po rtfo lio 73.70% 24.43% 3.017
S to c ks (50%) & Go ld 47.80% 3.326
(50%) Po rtfo lio 14.37%
S to c ks (50%) & S ilve r 48.30% 3.634
(50%) Po rtfo lio 13.29%
100% Go ld Po rtfo lio 21.80% 2.001
100% S ilve r Po rtfo lio 22.90% 1.742
100% Bo nd s Po rtfo lio 25.20% 7.92% 3.182
Bo n ds (50%) & Go ld 23.50% 8.79% 2.673
(50%) Po rtfo lio
Bo n ds (50%) & S ilve r 24.00% 6.58% 3.647
(50%) Po rtfo lio

31
 Agenda

 Overview
 Arbitrage Opportunities
 Hedging Opportunities
 Investment Opportunities
 Institutional Participation
 NCDEX

32
 Regulatory Facilitation

Institutional Participation Pool the retail money to the

Banks,MFs, PFs, FIIs market, boost liquidity & volume

Exchange Traded Benefit of ‘upside’ for

Options value-investing

Trading on
Benchmarking the market
Commodity Indices

33
 Banks - Present Scenario
 Not allowed to trade on commodity exchange
 Not allowed to do margin financing against commodities
 Bank lending to commodities remained very low
 Commodity a ‘sensitive sector’
 Not under priority sector lending
 Credibility of Warehouse receipts
 Reliability of the warehouse
 Hedging not possible

Bank lending against commodities was only Rs 9,952 cr out of Rs 8,64,143 cr

i.e. 1.1% as on March’04

34
 Involvement of Banks
 Banks as aggregators
 Institutions with good rural presence and sufficient financial
expertise and infrastructure
 Banks can hedge their agri and corporate loans
 Banks as market makers for price stabilization
 Role similar to the role of RBI for stabilization of dollar prices
 Banks as dealers in commodity markets

35
 FII presence

 Benefits  Issues involved

 More liquidity  Concentration and
 Broaden and deepen control over prices of
markets crucial commodities
 Help in the utilization of  Physical delivery
capital  Withdrawal from the
 Global experiences country
 Research
 Best practices

36
 Involvement of Mutual Funds

 Mutual Funds can bring liquidity and professional skill in

the commodity market
 Mutual Funds can mobilize small savings and invest in
commodities and commodity derivatives
 Easiest route for retail investment

37
 Options and indices
 Options
 Provides benefit of upside
 Substitute MSP of government
 Not allowed under FCRA
 Need for changes in the Act
 Indices
 Weather indices
 Regulatory changes needed

38
 Agenda

 Overview
 Arbitrage Opportunities
 Hedging Opportunities
 Investment Opportunities
 Institutional Participation
 NCDEX

39
 NCDEX – Current shareholders

NABARD NSE IFFCO CRISIL

15% 15% 12% 12%

ICICI Bank LIC Canara Bank PNB

15% 15% 8% 8%

-Only institutions are our shareholders

-NCDEX fully compliant with shareholding guidelines

40
 Independent Board of Directors
Name Organisation Expertise in

Shri U. S. Awasthi MD, IFFCO Agriculture

Shri R.N. Bharadwaj Chairman, LIC Insurance

Shri B.V. Bhargava Chairman, CRISIL Credit rating/finance

Shri S.H. Bhojani Partner, Amarchand Mangaldas & Co. Legal

Shri Dileep Choksi Sr. Partner, C.C Choksi & Co. Accounting

Shri D. S. Kolamkar Director, FMC Market Regulation

Smt Ranjana Kumar Chairperson, NABARD Rural finance/Banking

Shri Ravi Narain MD & CEO, NSE Exchange operation

Shri Lamon Rutten Chief - Finance & Energy, UNCTAD Finance & Energy

Shri Ravi Mohan MD, CRISIL Credit rating

Dr. Ajay Shah Consultant, Ministry of Finance Economics & Finance

Shri H.N. Sinor CEO & Secretary, IBA Banking & Finance

Shri P. H. Ravikumar MD, NCDEX Banking & Finance

41
 Product Calendar
Apr-Dec 2004 Jan – May
Dec 2003 2005 In pipeline

Gold,
Gold, Silver,
Silver, Guar
Guar seed,
seed, Gur,
Gur, Rice,
Rice, Other
Other base
base
Crude
Crude Palm
Palm Jute
Jute sacking,
sacking, Maize,
Maize, Raw
Raw Metals,
Metals,
oil, RBD
oil, RBD Chana,
Chana, silk,
silk, Cocoon,
Cocoon, Energy
Energy
Palmolein,
Palmolein, Rubber,
Rubber, Jeera,
Jeera, Chilli,
Chilli, Products,
Products,
Cotton,
Cotton, Pepper,
Pepper, Steel,
Steel, More
More
Mustard
Mustard Wheat,
Wheat, Cashew,
Cashew, Agricultural
Agricultural
seed,
seed, Castor
Castor seed,
seed, Cottonseed
Cottonseed products
products
Mustard
Mustard oiloil Guar
Guar gum,
gum, oilcake,
oilcake,
Soybean,
Soybean, Raw
Raw jute,
jute, Sesame
Sesame seed,
seed,
Refined
Refined soy
soy Urad,
Urad, Yellow
Yellow Tur,
Tur, Arabica
Arabica
oil
oil peas,
peas, Sugar,
Sugar, &
& Robusta
Robusta
Turmeric,
Turmeric, Coffee,
Coffee,
Soymeal
Soymeal Copper
Copper
Cathode
Cathode

Each product is selected after an in-depth research & market feedback

42
 Average daily volumes
Rs cr
2500
2231
2095
2015
2000 Peak Volume for a single day
Rs. 4271 cr on Mar 30 ‘05 1619

1500 1444

1231 1229

1000

691

500

21 55
0
Q 1 - Q 2 - Q 3 - O c t-N o v D e c - '0 4 J a n '0 5 F e b '0 5 M a r '0 5 A p r '0 5 M a y '0 5
2 0 0 4 2 0 0 4 2 0 0 4 0 4

Impressive growth of NCDEX with 85% volume contribution from agriculture

43
 Robust Deliveries - 2005
T O T A L D E L I V E R I E S ( in m e t r ic t o n n e s )

50000
44904
40000
30000 3 6 3 5 2 .3 5
28301
22904
20000
15624
10000
4686
0
J a n -0 5 Fe b-05 M a r-0 5 A p r-0 5 M a y-05 J u n -0 5

T O T A L D E L IV E R IE S

Deliveries of over 1,10,000 MT in first quarter 2005-06

44
 Deliveries to Open Interest – June 2005

Deliveries to
June deliverables Open
  COMMODITY in Metric tonnes Open Interest Interest

1 JEERA 2697 2721 99%

2 URAD 7990 8160 98%

3 CASTOR SEED 1270 1450 88%

4 GUARGUM 940 1085 87%

5 SUGAR S 110 130 85%

6 SUGAR M 12810 15260 84%

7 PEPPER 756 910 83%

  Others 9779    

Total quantity for delivery 36352    

Deliveries in over 18 commodities

45
 Architecture for Price Discovery
610 Spot Price
members 70,000
6600 polling
daily
terminals trades

490
155,0000
centres
daily
orders

37
80% agri
commodities
volume

250 Monthly
100 delivery
Awareness Deliveries of
centres 40-45000 tt
Programmes

46
 Price dissemination: Choose your crop

Radio
TV Channels E-chaupals
N-logue

News agencies
PCOs

Newspapers &
Kisan call
journals
centres

IFFCO, HAFED
AGMARKNET Bank branches
Warehouses

47
 NCDEX’s integrated financial solution for farmers

48
 Pre-harvest
Price
hedging
NCDEX

Aggregator Farmers Insurance

Bank
Finance

Buffering yourself from nature’s vicissitudes

49
 Post Harvest Scenario
Farmer sees NCDEX spot and futures prices

Sells futures On NCDEX

Approaches mandi of choice

Lodges goods
in NCDEX/NCMSL warehouse

90
WAREHOUSES Goods assayed
by approved assayers
Working with
all leading Warehouse Receipt
assayers
in electronic form
NCMSL
arranges Bank finance against WR
credit
50
 Grading and Standards: Improve your prospects

IARI
Quality
Grading in rice, wheat
standards
maize

CIRCOT
Grading in cotton

51
 Impact of NCDEX on Prices
Guar Seed Price (Rs/qtl) Raw Jute Price (Rs qtl)

  FY 02 FY 03 FY 04 FY 05   FY 02 FY 03 FY 04 FY 05

1st Qtr 823 840 1217 1082 1st Qtr 1146 1008 842 1056

2nd Qtr 821 1575 847 1625 2nd Qtr 1042 857 823 1405
3rd Qtr 698 1434 978  1669 3rd Qtr 1042 827 784 1557
4th Qtr 758 1439 958  1534 4th Qtr 1167 804 794 1303

Castor Seed price (Rs/20 kgs)

  FY 02 FY 03 FY 04 FY 05
1st Qtr 197 247 375 304
2nd Qtr 224 263 287 357
3rd Qtr 211 297 292 348
4th Qtr 211 363 300 305

Prices are those received by the farmers after adjusting for the taxes and other incidentals. The
Prices are from the following mandis: Bikaner, Calcutta and Ahmedabad. Numbers marked in
red pertain to Prices after trading was enabled on NCDEX.

52
 Thank You

53