Commodity
Also written Commodity (definition) · Commodities
Under Indian commodity derivatives law, any tangible good other than actionable claims, money and securities — sold in large, uniform quantities and approved by the government and SEBI for futures trading.
In plain language
A commodity is something physical you can touch, weigh and store — gold, crude oil, cotton, chana. It is not a share, a bond, or a claim on money.
Not every physical good can have a futures contract written on it. The government first has to allow trading in that good. Then SEBI has to approve a futures contract on it for a specific exchange. Only after both steps can traders buy and sell futures on that commodity.
Indian exchanges group commodities into four families: bullion, metals, energy and agriculture.
How it works
The workbook's own definition: commodity refers to tangible goods other than actionable claims, money, and securities. The underlying must be of uniform quality and produced in large quantities by many producers — a single farmer's unique crop cannot be a futures underlying, but wheat of a defined grade can.
The four categories and examples the workbook lists: Bullion (gold, silver); Metals (aluminium, brass, copper, lead, nickel, steel, zinc); Energy (crude oil, natural gas, electricity); Agriculture (barley, maize, guar seed, guar gum, pepper, cardamom, coriander, jeera, turmeric, rubber, cotton, and more).
A SEBI circular dated 11 January 2023 allowed exchanges to run multiple contract versions of the same commodity side by side — for example, a full-size gold contract alongside a 1-gram gold contract and a mini silver contract, giving traders of different sizes access to the same underlying.
A worked example
MCX lists a standard gold futures contract with a 1 kg lot, and separately a 1-gram gold mini contract under the January 2023 circular. Both are futures on the same underlying commodity — gold — but sized for very different participants: a bullion dealer hedging a kilogram-scale inventory uses the first; a retail investor wanting price exposure with a small outlay uses the second.
A cotton yarn manufacturer cannot get a futures contract written on the specific bale sitting in its own warehouse. It can only trade the exchange's standardised Kapas (raw cotton) contract, graded and specified by the exchange — because a commodity futures underlying has to be uniform enough that any two delivered lots are interchangeable.
Why NISM asks about it
Chapter 1, sections 1.3 and 1.5, define commodity and set out the four traded categories, and section 1.5 contrasts commodities with financial assets — physical, seasonal, and priced by supply and demand rather than by an issuer's creditworthiness. Expect a question naming the four categories, and one distinguishing a commodity underlying from a "security" as defined under SCRA.
Common exam traps
- "Commodity" and "security" are not opposites in Indian law. A commodity derivative is itself defined as a security under SCRA — it is the physical commodity that is not a security, not the derivative contract on it.
- Uniform quality is a requirement, not a detail. A good that cannot be standardised and graded cannot become a futures underlying.
- Government approval of the commodity and SEBI approval of the specific contract are two separate steps — both are needed before trading can start.
Check yourself
1.Which of the following macroeconomic factors have an impact on commodity prices?
- a)GDP growth rate
- b)Per capita income
- c)Growth in industrial production
- d)All of the above
Show the answer
Answer: (d) All of the above
This is the workbook sample question. "The GDP GROWTH RATE, CONSUMPTION PATTERN, PER CAPITA INCOME, INDUSTRIAL PRODUCTION, RETAIL SALES, CONSUMER CONFIDENCE, EMPLOYMENT RATE, INFLATION RATE, etc. are VERY IMPORTANT FACTORS IN DECIDING THE PRICE TREND OF A COMMODITY BOTH IN THE SHORT TERM AS WELL AS IN THE LONG TERM."
⚠️ "Some commodities, ESPECIALLY METALS INCLUDING PRECIOUS METALS, HAVE A CLOSER RELATIONSHIP WITH ECONOMIC VARIABLES such as economic growth, inflation."
The two named examples are worth carrying:
- ⚠️ "Generally, COPPER IS ALSO CALLED DR COPPER — it is said to be AN EFFECTIVE INDICATOR OF ECONOMIC GROWTH as its demand grows due to its use in POWER GENERATION, TRANSMISSION, CONSTRUCTION AND ELECTRONICS"
- ⚠️ "GOLD, on the other hand, is regarded as A HEDGE AGAINST INFLATION as investors tend to invest in gold when inflation rates move up"
And two current additions: ⚠️ "GLOBAL US TARIFF MEASURES ARE RESHAPING PRODUCTION AND EXPORT STRATEGIES and have the potential to DISRUPT COMMODITY SUPPLY CHAINS. Simultaneously, CHANGES IN US IMMIGRATION POLICIES, as a geopolitical factor, ARE AFFECTING WORKFORCE SUPPLY AND DEMAND."
2.What refers to the process of determining commodity price through forces of market demand and supply?
- a)Law of one price
- b)Price determination
- c)Price discovery
- d)Arbitrary pricing
Show the answer
Answer: (c) Price discovery
This is the workbook sample question. "PRICE DISCOVERY IN SPOT MARKETS refers to the process of DETERMINING COMMODITY PRICE THROUGH FORCES OF MARKET DEMAND AND SUPPLY."
⚠️ Note that the question describes the SPOT market version. In the futures market, price discovery is a different thing: "determining THE FUTURES PRICE THROUGH EXPECTED DEMAND AND SUPPLY AFTER DISCOUNTING EXPECTED NEWS, DATA RELEASES, AND INFORMATION ON THE ALTERNATIVE PRODUCTS."
The spot market prices what is; the futures market prices what is expected.
Why it is one of the four key economic functions: ⚠️ "THE ABILITY OF DERIVATIVES MARKETS TO PROVIDE INFORMATION ABOUT POTENTIAL FUTURE PRICES IS AN INTEGRAL COMPONENT OF AN EFFICIENT ECONOMIC SYSTEM." It guides producers on the timing of sales and farmers on cropping decisions, and smoothens the effect of inter-seasonal price fluctuations.
⚠️ Its precondition: "EFFICIENCY OF PRICE DISCOVERY DEPENDS ON THE CONTINUOUS FLOW OF INFORMATION AND TRANSPARENCY" — which is exactly what the mandi lacks and what eNAM supplies.
3.In which commodity derivative contracts are Foreign Portfolio Investors permitted to participate in India?
- a)All commodity derivatives including agricultural contracts
- b)Only cash-settled non-agricultural contracts and indices comprising such commodities — primarily crude oil and natural gas
- c)Only physically settled agricultural contracts
- d)FPIs are not permitted to participate at all
Show the answer
Answer: (b) Only cash-settled non-agricultural contracts and indices comprising such commodities — primarily crude oil and natural gas
⚠️ "To begin with, FPIs WILL BE ALLOWED TO PARTICIPATE IN CASH SETTLED NON-AGRICULTURAL COMMODITY DERIVATIVE CONTRACTS AND INDICES COMPRISING SUCH NON-AGRICULTURAL COMMODITIES." And separately: "They are allowed to participate ONLY IN NON-SENSITIVE COMMODITIES THAT ARE CASH SETTLED INCLUDING INDICES."
⚠️ "In recent years, FPIs have been allowed to take exposure in exchange-traded commodity derivatives, LIMITED TO CASH-SETTLED NON-AGRICULTURAL CONTRACTS, PRIMARILY CRUDE OIL AND NATURAL GAS."
The exclusion of agricultural commodities is deliberate — these are the "sensitive" ones, where foreign speculative flows could affect food prices.
The sequence of permissions:
- ⚠️ OCTOBER 2018 — SEBI allowed ELIGIBLE FOREIGN ENTITIES to hedge IF THEY HAVE OPEN POSITIONS IN COMMODITIES IN INDIA ARISING OUT OF THEIR BUSINESS OBLIGATIONS
- ⚠️ 2022 — amended to allow foreign investors through the FPI ROUTE WITHOUT UNDERLYING EXPOSURE, subject to conditions
- ⚠️ 10 MAY 2023 circular — FPIs allowed DIRECT MARKET ACCESS USING BROKER TERMINAL AND BROKER INFRASTRUCTURE
"FPIs desirous of participating in ETCDs SHALL BE SUBJECT TO RISK MANAGEMENT MEASURES APPLICABLE, FROM TIME TO TIME."
Domestic institutional access followed a parallel path: mutual funds from 2019, multi-asset schemes from 2018, and AIF Category III and PMS also permitted.
Where this is taught
Free preparation for NISM Series XVIRelated terms
- Soft and hard commoditiesThe basic split of the commodity universe: softs are perishable agricultural produce that is grown, hards are natural resources that are mined or processed.
- Commodity Transaction TaxA transaction tax on non-agricultural commodity derivatives — 0.01% on the sale of a futures contract, paid by the seller, with separate rates for options.
- Derivative under SCRASCRA's own definition of a derivative — commodity derivatives, plus any instrument deriving value from an underlying security or index — which brings commodity futures within SEBI's jurisdiction as securities.
- Barter systemThe direct exchange of one good for another, with no money involved — the starting point the workbook uses to trace how commodity trading evolved into spot markets, forward contracts and finally futures.
- Currency effect on commodity pricesSince most commodities are priced globally in US dollars, a weaker rupee raises their rupee price even if the dollar price is unchanged, and a stronger rupee lowers it.
- Dr CopperCopper's market nickname, earned because its demand — driven by power, construction and electronics — makes its price move closely with the health of the wider economy.
- Electricity futuresExchange-traded, cash-settled contracts that let participants lock in a price for round-the-clock electricity delivery over a month, up to three months ahead, without any physical delivery obligation.
- eNAMA Pan-India electronic trading portal that networks existing APMC mandis into one unified market for agricultural produce, run by SFAC under the Ministry of Agriculture and Farmers' Welfare.
- AGRIDEXNCDEX's agricultural commodity index, weighted across ten crops by production and liquidity — discontinued from 1 February 2022 after several of its constituent commodities stopped trading.
- BULLDEXMCX's sectoral index tracking sentiment in the precious metals segment, currently weighted roughly 60% gold and 40% silver, based on futures prices rather than spot.
- Financial futuresFutures on currency rates, interest rates (bond futures) and equity prices (stock or index futures) — grouped together in the workbook as distinct from commodity futures, and without a delivery notice period.
- West Texas IntermediateA high-quality, low-sulphur crude oil explored and traded within the United States, priced on NYMEX, and one of the world's two benchmark crude grades alongside Brent.
- CDMRDSEBI's dedicated department for regulating the commodity derivatives segment, created after the 2015 merger with the erstwhile commodity regulator FMC and now folded into SEBI's Market Regulation Department.
- Ready delivery contractThe spot-market transaction in which payment and delivery of a commodity both happen immediately — the workbook's own name for what is commonly called a cash or spot deal.
- Seasonality effectThe recurring swing in agricultural commodity prices between the sowing season, when spot supply is tight, and the harvest, when it becomes abundant — the main cause of backwardation in agri commodities.