It has been over three years since the government expressed the need for a spot exchange for gold. After this announcement, trade bodies and exchanges have been gearing up to be part of such a move. Multi Commodity Exchange of India (MCX) which has a monopoly in the gold futures and options market, is also looking at this space. MCX, Managing Director and Chief Executive Officer, Mrugank Paranjape in an interview with Cogencis’ Shrikant Kuwalekar, talks about MCX’s readiness to start spot exchange for bullion, gas, etc.
Edited Excerpts:
In a universal exchange regime, what growth does MCX expect in 2019-20?
The commodity derivatives market had faced two major shocks prior to 2017-18—the commodities transaction tax and demonetisation. In 2017-18, the levy was rationalised in favour of exchanges and the fading impact of demonetisation brought back volumes in commodities. So, it would be worthwhile to take 2017-18 as a base year to predict growth in the sector.
In the past, we have said that from that base, our revenue and volumes should grow 15-20 per cent per year. In the first year, the current financial year, we are definitely going to deliver much more than that. From next year, the 15-20 per cent kind of growth will continue for the next three-four years, which will help us retain our ‘commodity strong house’ status despite rising competition.
What are the growth drivers for the exchange and the commodities market in the coming years? The commodity sector is largely linked to GDP growth. If the economy grows 7-8 per cent, the market will grow 8-10 per cent. For MCX to grow 15-20 per cent, or higher than the 8-10 per cent bracket, there are four major factors—distribution, product, institutional participants, and increased hedging that creates more liquidity. Of these, MCX has one—distribution.
Future growth will come from distribution, which is when all bank subsidiaries start broking. That will definitely kick in in the next financial year. So far, Kotak Securities and Axis Securities are the two bank subsidiaries that have started operations at MCX, while HDFC Securities and SBI Capital Markets are expected to log in this month.
On the product side, we are running a bit behind expectations. Options have started, but have not picked up as expected. It might take a couple of years to grow at expected levels. Securities and Exchange Board of India’s (SEBI) consultation paper on indices, however, is a big plus point for future development, because India is a market with a pool of people with ability to trade, and I think the cash settlement product makes sense.
We think institutional participation has not come at all. But with mutual funds getting the final nod from the SEBI this quarter, it will be a reality. The contribution of hedging is a continuous process. We have seen some impact, which is more regulatory-led on gold, something that pushed the once top-traded bullion complex to the third spot on the exchange. However, there is clearly an increase in traction for gold and I hope that this year, bullion will regain its lost glory in MCX’s overall volumes. Hedging by small enterprises and big corporates in bullion is rising, which was reflected in open interest in gold last week.
What is your plan on indices and products on indices?
MCX has been publishing six indices, of which a broad-based index of all commodities traded on the MCX, a precious metal or bullion index, and a base metal index are relevant in today’s market. Going forward, we may add an energy index, which will complete the basket. The exchange has a tie-up that ensures access to governance, methodology, production and, more importantly, the distribution of Thomson Reuters. To back-test these indices, MCX has the data for more than eight years. We hope to launch the first index in April-June.
Base metal futures are getting compulsory delivery contracts. Is this a threat to volumes on the MCX?
There is some bit of work for us to do there, and we need to create a way that the market can play it out. But the threat to volume is overplayed. We have been engaged in bullion deliveries for so many years that making contracts deliverable is no hindrance. The exchange has already launched compulsory delivery contracts in aluminium and zinc expiring from March. It has tied up with Yamada Logistics for delivery at Bhiwandi in Thane district. Another warehouse service provider will come on board soon. Lead and nickel would be the next contracts to be deliverable in Chennai.