What is NCDEX?

The National Commodity and Derivatives Exchange (NCDEX) is India’s largest exchange for agricultural commodities. The exchange is fully electronic and plays a crucial role in the agricultural market by facilitating the trading of derivative contracts for several agricultural commodities, such as wheat, cotton, and sugar.

The NCDEX trading platform is used by several parties, including farmers, traders, and investors. The exchange supports market participants and helps them manage risk. Further, it plays an important role in price discovery, settlement, and clearing processes. In this blog, we will take a closer look at the NCDEX and dive deeper into its features and role.

What is NCDEX?

The National Commodity and Derivatives Exchange, or the NCDEX, is India’s largest exchange for agricultural products and derivatives. The primary purpose of the exchange is to facilitate the electronic trading of agricultural derivative contracts like futures. The exchange mainly focuses on agricultural commodities like wheat, sugar, spices, and cotton.

Before transitioning to the Securities Contracts (Regulation) Act, 1956, the NCDEX was governed by the Forward Contracts (Regulation) Act, 1952. At present, the NCDEX is managed by an independent board, with the Securities and Exchange Board of India (SEBI) maintaining supervision and oversight of the exchange.

History & Evolution of NCDEX

The NCDEX was established on April 23, 2003, and commenced operations on December 15, 2003. The founding members of the exchange include major financial institutions like the National Stock Exchange (NSE), ICICI Bank, CRISIL, National Bank for Agriculture and Rural Development (NABARD), and Life Insurance Corporation (LIC).

The NCDEX, a fully electronic and technology-driven exchange, has been playing a vital role in the growth of agricultural trading in India. Over the years, it has launched numerous products, aided in fair price discovery and helped effectively manage risk.

The NCDEX trading platform is used by multiple traders, farmers, and investors due to the variety of agricultural commodities that can be traded on the exchange, along with the various products that market participants can utilise. To further make the trading process efficient, the NCDEX introduced trading instruments like futures, options, and indices in the agricultural market of India.

Some of the key achievements of the NCDEX include:

•       Increasing the level of transparency in the agricultural trading market
•       Aiding farmers and traders in the fair price discovery of agricultural products
•       The prices of NCDEX are often used as global benchmarks
•       Being regulated, the NCDEX has created a secure environment along with fostering growth.

Commodities Traded on the NCDEX

The commodities traded on the NCDEX can be divided into four primary categories:

•       Agricultural commodities: Wheat, maize, guar seed, guar gum, paddy, etc.
•       Spices: Coriander, cumin, turmeric, pepper, etc.
•       Pulses & oilseeds: Mustard seed, castor seed, chana, bajra, etc.
•       Other commodities: Cotton and sugar.

Guar seed, guar gum, and cottonseed oilcake are some of the most actively traded commodities on the NCDEX.

How NCDEX Works

The NCDEX is an exchange for agricultural commodities and is important in connecting buyers and sellers of different agricultural products. The NCDEX enables market participants to buy and sell derivative contracts of various agricultural products.

Trading on the NCDEX is a streamlined process. Traders, farmers, or investors can place buy and sell orders through registered brokers. NCDEX offers instruments such as futures and options (F&O) by which one can trade various commodities. Here, the price discovery of a commodity is determined largely by supply and demand.

The National Commodity Clearing Limited (NCCL) clears and settles all deals executed on the NCDEX. The NCCL settles all trades executed on a net basis for daily settlements and on a gross basis for delivery settlements. The NCCL also provides its clearing members with financial compensation to make good losses in the case of a non-defaulting party or pay-in of funds or goods in the case of a defaulting party.

Also Read: Differences between MCX vs NCDEX

NCDEX Trading Instruments

Commodities on the NCDEX can be traded via derivative instruments like futures and options. There are also indices that track the movement of commodity prices.

•       Futures contracts are the most commonly used instrument for trading agricultural commodities.
•       Options contracts are available for only select commodities.
•       The NCDEX index tracks the price movements of 10 agricultural commodities. The index tracks the spot prices of the commodities, giving equal weightage to each commodity.

The spot price of a commodity refers to the current quote or the price at which one can take delivery of a commodity at the moment. A commodity's futures price signifies a commodity's estimated value in the future.

NCDEX vs. MCX: Key Differences

Here are some key differences between NCDEX and the Multi Commodity Exchange (MCX).

 How to Trade on NCDEX?

The process of trading on the NCDEX is straightforward.

1.       First, open an account with an NCDEX-registered broker.
2.       Submit the necessary documents like Aadhar Card, PAN Card, and bank statements to complete the KYC process.
3.       Deposit the margin money to begin trading.
4.       After depositing the margin money, select a commodity and the instrument that you want to trade.
5.       Place buy or sell orders using the trading platform.
6.       Monitor your positions and manage risk effectively.
7.       Settle your positions by taking physical delivery or through cash settlement.

Regulations & Governance of NCDEX

The NCDEX is regulated by SEBI under the Commodity Derivatives Market Regulation. SEBI plays a vital role in governing the exchange to ensure transparency and prevent any fraudulent activities. Guidelines issued by SEBI help exchanges maintain a fair pricing mechanism along with safeguarding the interests of market participants. The size of contracts traded on the NCDEX is standardised to streamline the trading and settlement process.

NCDEX Financial Performance

NCDEX clocked its highest daily turnover of ₹2,027 crore during FY24. The exchange’s consolidated revenue for FY24 grew 0.32% year-on-year (YoY) to ₹1,360 crore. The exchange’s net loss for the fiscal year narrowed to ₹277 crore from ₹423.7 crore in the previous financial year.

The average daily traded volume of the exchange in FY24 was ₹848 crore compared to ₹838 crore in the previous year.

The NCDEX has witnessed growth due to increasing participation from institutional investors and government policies providing support to agricultural trading. Going forward, the exchange aims to work closely with policymakers and take on advisory initiatives to boost agricultural trading in India.

Advantages & Challenges of NCDEX

Advantages:

•       NCDEX enables farmers and agri-businesses to hedge their risks.
•       Supports fair and transparent price discovery based on demand and supply dynamics.
•       Creates and promotes an environment of organised agricultural trading in India.
•       Investors can benefit from high liquidity and discover investment opportunities on the exchange.

Challenges:

•       Awareness of agricultural trading among retail investors is low.
•       Prices of agricultural commodities can be volatile, making trading difficult.
•       The prices of agricultural goods are impacted by weather and government policies.
•       Physical settlement process can be challenging due to storage and transportation of agricultural goods.

Future of NCDEX & Recent Developments

The NCDEX is poised to grow in the future with the growth in agricultural trading in India. Government policies are also helping to raise awareness of agricultural trading among retail investors. The NCDEX is also introducing new products and instruments to make trading easier. The integration of algorithmic trading and other digital platforms will support and boost growth in the future.

Conclusion

NCDEX’s role in India’s agricultural trading is crucial. Not only has the exchange promoted and helped grow the industry, but it has also created a digital, modern, and secure environment. The exchange helps traders, farmers, and investors hedge their positions and discover new opportunities. With technological developments and accommodating government policies, the exchange's future looks bright.