NCDEX Joins Gold Rush with New Futures Contract

Indian commodities exchange, the National Commodity & Derivatives Exchange Limited (NCDEX), has announced the launch of its new precious metals futures contract. The 11-year-old Mumbai-based exchange will offer gold futures from the 16th of January, after Volatility has triggered increased interest in the yellow metal.

During the midst of India's currency crisis in 2013, which saw the rupee drop over 20%, the central bank introduced various measures to stabilize the markets. One such measure relating to gold was to restrict the amount of gold investment. In addition, the RBI had requested banks to purchase gold from jewellers and individuals in order to manage the impact on the declining currency. As a result, the NCDEX has launched its new contract focused on corporates and hedgers.

A spokesperson for the exchange explained why the contract holds significance during volatile periods in international and domestic markets, stating in a comment to Forex Magnates: “The correlation between Indian and international gold prices has been affected due to recent government policies. Heavy import duty, compulsion of special allocation for export in imported lot of gold and banking and financing restrictions have caused changes in the gold ecosystem and gold futures prices. Keeping this in mind, the exchange is launching a futures contract which will provide participants an investment / hedging option.”

Amid the gold crisis of 2013 when the precious metals fell the highest amount in 30 years, gold ETF investments saw a departure of assets in excess of $1 billion during the immediate aftermath of the dive in the price of the safe haven instrument. However, a rapid drop in the price of gold created a buying frenzy in Asia and consequently a balancing act took place.

Marcus Grubb, Managing Director, Investment at the World Gold Council, commented about the changing nature of gold during last year in a comment: “The global gold market remains resilient, underpinned by the continued shift in demand from West to East, strong demand in consumer categories and solid central bank and technology sectors.

The growth we are seeing in jewellery, bars and coins in particular, demonstrates once again the unique diversity of gold demand, as different sectors increase in prominence at different points in the global economic cycle, clear evidence of the ebb and flow of what is an extremely liquid market.”

Opportunities in Derivatives

India, one of the world's largest consumers of gold holds sentimental value for the precious metal. It's widely used during festivities such as Eid and Diwali and in celebrations such as marriage. The country has a large physical consumption and the role of derivatives for risk and price management has significant potential.

D K Agrawal, Managing Director of a domestic broker SMC India, explained how important derivatives are and the significance of innovative ideas by trading venues in a comment to Forex Magnates: “Considering the huge physical market volume in India the future volumes are at a very low multiple. If the new exchanges come with differentiated offering and provide niche products I believe there will be enough volume for even the new exchange. These exchanges are also providing arbitrage opportunities to the investors and trade volume is gearing up even in the new exchanges. However, it would take some more time for newer exchanges to get sufficient volume to justify their existence."

Ashok Mittal, CEO of Emkay, added his views on the competitive nature of India's brokerage sector, he said: “There is always scope for any new player in the market. This not only allows the competition but also better services and pricing to the participants. Though the success of any new exchange will depend on the product being offered by the exchange. It is surely going to be tough for the new entrants to increase their market share. I also feel that with the entry of new exchanges the size of market shall also increase.”

NCDEX had promising news for its energy contract, on the 10th of January, it traded 2,200 barrels in crude oil futures.

Apart from commodities contracts, India will welcome interest rate futures. MCX SX, has received approval for SEBI to offer interest rate futures contract. A copy excerpted from a subsequent press release, regarding the newly announced NCDEX contract, can be seen below, highlighting some of its key specifications.