Liquidity value
Also written Liquidity score · Liquidity value of a commodity
One of the two scores that fix a commodity's weight in an Indian commodity index — the average trading volume of its futures over the last 12 months.
In plain language
Once an exchange has decided which commodities go into an index, it has to decide how much of each.
SEBI does not let it guess. Weights are set by scoring every commodity on two things.
One is how much of the commodity the country actually produces and imports. That is production value.
The other is how much of it actually trades. That is liquidity value, and the workbook defines it in a single line: the average trading volume of its futures in the last 12 months.
So a commodity earns index weight two ways. By mattering to the physical economy, and by being tradeable.
The two scores are then combined in a ratio, and neither of them may be worth less than 25%. MCX currently uses 25% for production and 75% for liquidity.
How it works
The rule. Weights of commodities in the index are decided by the exchanges, based on their scoring on the overall physical market production value and liquidity value. These two scores should be in a ratio of 25:75, meaning neither of their weightages shall be below 25 per cent — so one of the two factors gets a minimum of 25% and the other about 75%. MCX is currently assigning 25:75 to the production score and the liquidity score.
The two definitions, side by side.
| Score | Definition | Window |
|---|---|---|
| Liquidity value | the average trading volume of its futures | the last 12 months |
| Production value | the average value of deliverable supply, where deliverable supply in a year is production plus import in that year | the past 5 financial years |
Why liquidity gets the larger share in practice. An index nobody can replicate is not tradeable, and two other construction rules point the same way. A constituent's commodity futures must have been in existence for at least the last 12 months and must have traded on 90% of the trading days during those 12 months. And in a composite index, a minimum 80% of index weight must comprise commodity futures whose minimum Average Daily Trading Volume is at least Rs 75 crore for agri commodities and Rs 500 crore for non-agri; anything failing that test may not exceed 15% weight.
The caps that sit on top. In a composite index each constituent gets a minimum 1% and a maximum 30%, and exchanges may set tighter bands inside that — MCX iCOMDEX uses 2% to 30% with a sectoral-level cap of 40%. In a sectoral index there is no such cap at all.
When it is measured. The 12-month window is a trailing year, taken at construction or rebalancing. Weights then stay fixed for a year, are reviewed and rebalanced at least once a year, and any rebalance must be disclosed at least three months before publication on the new weights.
One structural contrast worth holding. Commodity indices are price-based, so weights do not drift after they are set. Equity indices are volume-based, where weights of the underlying securities keep changing daily with market capitalisation. Liquidity value is therefore an annual measurement, not a live one.
A worked example
Build a three-commodity sectoral index from scratch.
| Commodity | Deliverable supply, 5-year average (Rs crore) | Production share | 12-month average futures volume (Rs crore) | Liquidity share |
|---|---|---|---|---|
| Gold | 3,20,000 | 64% | 14,00,000 | 70% |
| Silver | 80,000 | 16% | 5,00,000 | 25% |
| Copper | 1,00,000 | 20% | 1,00,000 | 5% |
| Total | 5,00,000 | 100% | 20,00,000 | 100% |
Combine them at MCX's 25:75:
| Commodity | 25% x production | 75% x liquidity | Index weight |
|---|---|---|---|
| Gold | 16.00 | 52.50 | 68.50% |
| Silver | 4.00 | 18.75 | 22.75% |
| Copper | 5.00 | 3.75 | 8.75% |
Now flip the ratio to 75:25, which the rule also permits since neither factor falls below 25%:
| Commodity | 75% x production | 25% x liquidity | Index weight |
|---|---|---|---|
| Gold | 48.00 | 17.50 | 65.50% |
| Silver | 12.00 | 6.25 | 18.25% |
| Copper | 15.00 | 1.25 | 16.25% |
Copper's weight nearly doubles, from 8.75% to 16.25%, without a single underlying number changing. The choice of ratio is not cosmetic — it decides how much a thinly traded but physically important commodity is allowed to matter.
One compliance check before this index can exist. Gold at 68.50% would breach the 30% per-constituent cap outright if this were a composite index, and the 80%-of-weight ADTV screen would have to be cleared as well. These weights are lawful only because the index is sectoral, where the 30% limit per commodity does not apply.
Why NISM asks about it
Chapter 2 (Commodity Indices), section 2.3, point 5 of the index construction and maintenance rules.
The chapter's own sample question is on exactly this point: which of the following ratios are as per the regulatory requirements for production related weights and liquidity related weights while constructing index — and the answer is minimum 25% each factor, not equal 50:50, not a minimum of 40% each, not a maximum of 60%. Beyond it, expect the two one-line definitions and their two different windows: liquidity value over the last 12 months, production value over the past 5 financial years.
Common exam traps
- Twelve months for liquidity value; five financial years for production value. Two windows, and swapping them is the commonest error in this section.
- The rule is a 25% floor on each factor, not a fixed 25:75 split. The workbook's own answer is minimum 25% each factor. MCX happens to use 25:75; a 40:60 or 75:25 split would also comply.
- Liquidity value is a volume, not a price. It measures how much of the futures traded, not how dear the commodity is.
- It is the volume of the futures, not of the physical market. Physical throughput is what production value captures.
- Weights are fixed once set. A commodity whose volumes collapse in March keeps its weight until the annual rebalance, unless its derivatives stop trading altogether.
- This is not the ADTV screen. The Rs 75 crore agri and Rs 500 crore non-agri Average Daily Trading Volume floors decide whether a commodity may carry more than 15% weight in a composite index. Liquidity value decides how much weight it gets. Two tests, same section.
- Commodity indices are price-based; equity indices are volume-based. Liquidity value is measured annually, not continuously, so a commodity's index weight does not move with its own price.
Check yourself
1.Which of the following ratios is as per the regulatory requirement for production-related weights and liquidity-related weights while constructing an index?
- a)Equal weight, i.e. 50:50
- b)Minimum 25% each factor
- c)Minimum 40% each factor
- d)Maximum 60% each factor
Show the answer
Answer: (b) Minimum 25% each factor
(This is a sample question from the NISM workbook.)
The two scores should be in a ratio of 25:75, meaning either of their weightage shall not be below 25 percent — production or liquidity must carry a minimum of 25% weight and the other about 75%.
Read the rule as a floor, not a fixed split. Any allocation between 25:75 and 75:25 complies. MCX is currently assigning 25:75 weights to production score and liquidity score — one permitted choice among several, not the only legal one.
That is why option (a) is wrong even though a 50:50 split would in fact be permitted: the question asks what the regulation requires, and it requires only the 25 percent floor.
The two scores themselves:
- Production value = average value of deliverable supply over the past 5 financial years, where deliverable supply = production plus import
- Liquidity value = average trading volume of its futures in the last 12 months
Where this is taught
Free preparation for NISM Series XVIRelated terms
- Average Daily Trading VolumeThe liquidity test a commodity future must pass before its price may carry weight in a tradeable commodity index — Rs 75 crore a day for agri, Rs 500 crore for non-agri.
- Composite indexA commodity index spanning several segments — energy, metals, bullion — whose constituents must each weigh 1 to 30 per cent, with at least 80 per cent of the weight in sufficiently liquid futures.
- GUAREXNCDEX's sectoral commodity index on the guar family, with only two constituents — guar seed at 59.35% and guar gum at 40.65% for the year 2022-23.
- METALDEXMCX's base metal sectoral index — for 2025, copper 40%, aluminium 30%, zinc 26% and lead 4% — which the workbook also reads as a rough inflation gauge for the metals family.
- Price-based indexAn index whose constituent weights stay fixed for the year, so the level moves only when prices move — how every Indian commodity index works, as against volume-based equity indices.
- Production valueOne of the two scores that fix a commodity's index weight — the average value of deliverable supply over the past five financial years, where deliverable supply is production plus import.
- Sectoral indexA commodity index built from the futures of a single segment — bullion, base metals, energy or the guar family — with fixed annual weights and no 30 per cent cap per constituent.
- Three-month disclosure ruleThe requirement that a proposed rebalanced commodity index — its new weights and constituents — be publicly disclosed at least three months before the exchange starts publishing the index on those new weights.
- Volume-based indexAn index whose weights shift daily with market value, the way equity indices work — unlike commodity indices, which fix weights for a year at a time.