Commodity derivative trading in India has come out of the state of hibernation in last few years. Global economic recovery, trade liberalization, and growing awareness about derivatives trading and their potential to mitigate the underlying risk have brought the revolution in the commodity market. But the Indian commodity market is still in developing stage as compared to global commodity derivative market. This article probes into the related issues.

Commodity markets play an important role in countries like India where a major part of GDP comes from agricultural production. But surprisingly, the commodities market in India is still in a nascent stage. This is more surprising as healthy commodity markets will not only benefit the farmers but also the sectors that depend on it. Infact, derivative as hedging instrument had first emerged in this market and these instruments were used to protect farmers from the risk of the value of their crop going below the cost price of their produce.

Alan Greenspan, Chairman, Board of Governors of the US Federal Reserve System says, "These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it - a process that has undoubtedly improved national productivity growth and standards of living". Investment Guru, Marc Faber also predicts that the next big boom will be in hard assets, i.e., commodities. According to him, massive depreciation in financial assets, due to excessive printing of money and global economic recovery will make commodities appreciate in relative terms. These benefits of commodity derivatives are not limited to investors, but they proved as key instruments for banks and other financial services to manage risk on a portfolio basis. For banks and financial services industries, the commodity derivatives market is also important from the point of proposed Basel II capital requirements and the sophisticated risk-management approaches that are needed to be incorporated by banks in years to come.

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