In an interview with Vrinda Sharma of Zee Media Corp, Rajiv Kapoor, Head Commodities, Trustline shares his views on commodity price trend, outlook and fundamentals.
What are the key expectations of commodity sector from General Budget?
We have seen that volumes of commodity market on exchanges have dropped drastically in last one year, especially post CTT levy, so our primary demand with the govt would be either CTT should be abolished or reduced to the extent of at least 50 percent, so that volumes would come back to the exchanges.
From other participants' perspective, like jewelers, import duty on gold should be reduced, so that the parity with the gold can be narrowed down because Indian gold is very expensive due to the 10 percent of import duty.
Apart from that, 80:20 rule should be relaxed to some extent so that importing gold gets easier for the Indians. Right now if you see the spot premium over futures market is roughly Rs 800 to Rs 1000 that makes it very expensive in hands of actual users and because of that physical demand is also coming down.
Trader lobbies are expecting a cut of more than 5 percent in import duty of gold? Will the govt cut gold import duty to such a large extent?
I don't think the govt will cut the duty to that extent, of 5 percent. See, if they will reduce the 5 percent import duty, again the bill on account of gold import will increase, so govt's primary target should be to keep a check on the fiscal deficit and the same was earlier started by our former Finance Minister P Chidambaram, so he put such kind of sanctions on gold import and hiked the import duty also.
5 percent of duty cut is unlikely, but the govt may keep it at the extent of 2 to 3 percent because it cannot afford to encourage gold import in such huge proportions. By doing so the govt can reduce the further pressure on rupee, which was seen because of the heavy gold import.
Commodity sector is also demanding withdrawal of CTT. Will the govt accept this in the Budget?
Commodity Transaction Tax (CTT) should be withdrawn so that the volumes can be brought back on the exchanges, we can compare the volumes of the gold specially. Last year in June, gold which traded to the tune of 2,60,000 lots, stood at nearly 1,50, 000 lots in the same month this year, so volumes dropped to the extent of 75 percent, which is the impact of the CTT only. So once CTT is reduced or abolished, it will bring back arbitrageurs on the platform and they will provide liquidity to the market. Once liquidity comes back on the exchanges, the govt will earn more. See, if the volumes grow by, lets say, 100 percent from here even after reduction of CTT to the extent of 50 percent, whatever the exchequers are getting on account of the CTT will not hamper.
It is also rumored that govt might ban future trading of some of the commodities in view of rising inflation. What is your view on that?
Yeah, absolutely the govt has taken some steps. Like, potato was the latest victim of rising inflation. Govt has passed on clear instructions to FMC and FMC passed the same to the exchanges that further positions are not allowed in this counter. Apart from that, FMC has also raised the margins to the extent of 100 percent and further contracts launching is also banned until further indications from the Finance Ministry.
These type of steps might be repeated in the other commodities but we are not sure that will happen. However, these steps could help govt in curbing the inflation, but I don't think this will be workable either. This is because we have seen that even the commodities, trading on the exchanges, are quoting on the lower level than the spot market prices. So banning a commodity on the futures market is not a solution to check inflation. In fact, to rein in inflation, the govt has to reduce some import duties on commodities like soya oil and soya bean in case the harvest is affected by the drought.
Right now, drought is not declared yet but it is being predicted that the rainfall may be scanty or there will be 30 to 40 percent less rainfall that will definitely impact crops. So the govt should take some another kind of steps. The government should give soaps to the farmers so that they can irrigate their fields and protect their harvests. This type of action may be fruitful.
Apart from that, the govt should start linking of rivers to meet the drought situation in parts of the country. Also, warehousing should be promoted.
Govt is seriously considering measures to monetize the gold lying in PSU banks? Do you think this will help the govt in checking inflation?
I think monetizing of gold will not be helpful in checking inflation. Why investors invest in gold? Because gold is an investment asset class used to beat inflation. When there is inflation, gold rate increases because the currency drops and to hedge currency risk, gold is the best asset class so monetizing of gold will not be helpful to that extent.
FCRA is yet to be approved. Will govt take some action on this long-awaited bill in this Budget?
Yeah, definitely amendment is required so that new instruments like options should be introduced in the commodity market. FCRA will also empower FMC to take stringent actions against the culprits who manipulate the prices.
FMC should also be empowered enough like SEBI so that they can function like an independent regulatory authority.
