Commodity markets in India play a significant part in our country’s economy. These markets enable the trading of various commodities, such as agricultural harvests, metals, and energy products. We have conducted research and narrowed it down to some key roles that display the importance of the commodity market in India. Below, we have jotted down some of these key roles in the Indian commodity market.
Table of Contents
Key Roles of the Commodity Market in India
Commodity Markets Aid in Determining the Market Price
Commodity markets help in discovering the market price of various commodities based on supply and demand dynamics. This data is advantageous for farmers, traders, and other market partakers to make well-versed choices about production, storage, and sale of commodities.
Commodity Markets Provide Tools for Risk Management to Avoid Losses
Commodity markets offer hedging tools such as futures and options contracts that allow market participants to manage their price risks. Farmers and other producers can use these tools to lock in prices for their crops or products, which helps them manage their cash flow and reduce the impact of price volatility.
Commodity Markets Provide Financial Assistance to Market Participants
Commodity markets provide a platform for farmers and other producers to obtain financing by pledging their produce as collateral. This helps them to obtain working capital at competitive rates and manage their cash flow.
Commodity Markets Offer Integration of Various Different Markets
Commodity markets facilitate the integration of various regional and national markets by providing a common platform for trading. This helps to reduce price disparities and promote efficient price discovery.
Overall, commodity markets in India play a crucial role in ensuring the smooth functioning of the agricultural and industrial sectors by providing price discovery, risk management, financing, and market integration. Going ahead, let’s understand some of the key functions of commodity markets in India.
What Are a Few Important Functions of the Commodity Market in India?
So far, we have understood that pricing, risk management, and market integration are some of the key roles of the commodity market. In addition to these roles, the commodity market also provides some important functions that encompass storage and warehousing. This involves the facilitation of the storage and warehousing of commodities, which ensures their quality and availability for future use.
Overall, the commodity market plays a critical role in the Indian economy by facilitating price discovery, risk management, financing, storage, and market integration for various commodities. Going ahead, let’s understand the most significant commodities in the Indian market.
What Are the Four Most Important Commodities of India?
India is a nation with a diverse variety of commodities that are important for its economy. Some of the major commodities of India include:
Agriculture Products Are Naturally Going to the Top of the List
India is primarily an agricultural country, and some of the most important commodities in this sector include rice, wheat, pulses, cotton, jute, sugarcane, tea, and coffee.
Minerals Come Second in the List after Agriculture
India is naturally gifted with minerals like iron ore, coal, bauxite, manganese, chromite, copper, gold, and limestone. These minerals are used for numerous purposes, such as building structures, manufacturing, engineering, and energy generation.
After Minerals Come Textiles
India is famous for its textile industry and is one of the chief manufacturers and exporters of cotton textiles globally. Other textiles produced in India include silk, wool, jute, and synthetic fibres.
Last but Not Least, Petroleum Products
India is heavily dependent on imported crude oil, but it has a significant refining capacity to produce petroleum products such as petrol, diesel, LPG, and kerosene.
Since you now have a fair understanding of the commodity market’s roles and functions, let’s understand how you can invest in the commodity markets.
Six Steps to Invest in the Commodity Market in India
Investing in commodity markets in India can be done through various avenues such as commodity exchanges, mutual funds, or physical purchases. Here are some steps you can follow to invest in commodity markets in India:
Step 1: Learn about the Different Commodities
Commodities refer to physical goods that are traded on exchanges, such as gold, silver, agricultural harvests, crude oil, natural gas, etc. Research and understand the supply and demand dynamics of the commodity you are interested in investing in and the factors that can impact its price.
Step 2: Choose a Commodity Exchange
In India, there are three commodity exchanges that are considered national-level exchanges – Multi Commodity Exchange of India Ltd. (MCX), National Commodity and Derivatives Exchange Ltd. (NCDEX), and Indian Commodity Exchange Ltd. (ICEX). Choose an exchange that trades the commodity you want to invest in.
Step 3: Open a Trading Account
To invest in commodity markets, you essentially open a trading account with a registered broker of the commodity exchange you have chosen. The broker will help you buy and sell commodities.
Step 4: Fund Your Trading Account
After you have opened a trading account, you need to add funds through methods like the Unified Payment Interface (UPI) to buy or sell commodities.
Step 5: Decide on the Investment Strategy
You can invest in commodities either through futures contracts or spot markets. Futures contracts permit you to buy or sell a commodity at a prearranged price and date in the future, while spot markets allow you to buy or sell the commodity at its current market price.
Step 6: Monitor Your Investments
Keep a record of how your investments perform and make changes to your investment plan as required.
Alternatively, you can also invest in commodity mutual funds that invest in various commodities, providing diversification and professional management. Some examples of commodity mutual funds in India include Axis Commodity Equity Fund, DSP Natural Resources, New Energy Fund, etc.
It is worth noting that investing in commodity markets is risky since these markets are volatile and require careful research and analysis. It is prudent to seek the help of a financial consultant before making any investment verdicts.
Conclusion
Commodity Markets help in finding out the Market Price. They make provisions to use risk management tools to avoid losses. Commodity markets offer financial help to most market participants. They also offer the integration of several different types of markets.
