Production value

How much index weight should a commodity get? SEBI's answer uses two scores, and one of them is about the physical economy.

Production value is the average value of deliverable supply in the past five financial years.

Deliverable supply has its own definition. In a year, it is production plus import in the same year.

So the measure is not what India grew or mined. It is what was actually available to be delivered here, and that includes what was brought in from abroad.

That is why a commodity India barely produces can still carry real index weight. Import counts.

The other score is liquidity value, the average trading volume of the commodity's futures over the last 12 months.

The two are combined in a ratio, and neither may be worth less than 25%. MCX currently uses 25% for production and 75% for liquidity.

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. The two scores should be in a ratio of 25:75, meaning neither of their weightages shall be below 25 per cent. MCX is currently assigning 25:75 to the production score and the liquidity score.

The definition, in two layers.

Both layers are examined, and a candidate who knows only the first misses the import.

Note the word value. The workbook says average value of deliverable supply, not average quantity. So a rise in either the tonnage or the price lifts the score.

Why a five-year window. It smooths the crop cycle. A single bad monsoon does not knock a commodity's index weight about — which fits a framework in which weights are fixed for a year anyway.

Why import is in there. Because the definition says so. Deliverable supply is production plus import, so a commodity that India imports heavily is scored on what is actually available to deliver in the Indian market, not on domestic output alone. Exports do not appear in this definition at all.

Scoring high on this alone is not enough. The workbook's own demonstration: for 2021, NCDEX's AGRIDEX had 10 commodities, and because the weights are averages of two factors — production volume in rupees, and liquidity — the final constituents were selected from those commodities that scored reasonably high on both parameters.

The other construction rules it sits inside. A constituent's commodity futures must have been in existence for at least the last 12 months and traded on 90% of the trading days in those 12 months. In a composite index a minimum 80% of index weight must comprise futures whose minimum Average Daily Trading Volume is at least Rs 75 crore for agri and Rs 500 crore for non-agri, with anything failing that capped at 15% weight; each composite constituent sits between 1% and 30% (MCX uses 2% to 30% with a 40% sectoral cap); a sectoral index has no such cap. Weights are then reviewed and rebalanced at least once a year, with any rebalance disclosed at least three months in advance, and the index value is not reset to base.

One wording point. The workbook names this same factor three ways — production value in section 2.3, the production score in the same paragraph, and production volume in Rupees when describing AGRIDEX. They are one thing.

Compute a production value for chana from five years of deliverable supply. The definition and the five-year window are the workbook's; the quantities and prices are illustrative.

Five-year total = Rs 3,10,400 crore, so production value = Rs 62,080 crore.

Look at FY2023-24. Production fell to 98 lakh MT, the worst of the five years — a 20% drop from the year before. But imports rose to 9 lakh MT, so deliverable supply held at 107 lakh MT, a fall of only 14%. If the measure had been production alone, chana's score would have taken the larger hit. Import is part of the definition precisely because it is part of what can be delivered.

Now turn the score into a weight. Put chana in a two-commodity index against another commodity whose production value is Rs 37,920 crore, so the two sum to Rs 1,00,000 crore:

Chana dominates the physical measure — 62% of the deliverable supply value — and still gets the smaller index weight, because liquidity carries three quarters of the score. That single row is the clearest statement of what the 25:75 ratio is for: the index has to be tradeable before it can be representative.

Chapter 2 (Commodity Indices), section 2.3, point 5 of the index construction and maintenance rules, with the AGRIDEX illustration in section 2.3's worked constituent tables.

The chapter's own sample question is on the ratio: which of the following ratios are as per the regulatory requirements for production related weights and liquidity related weights while constructing index — the answer is minimum 25% each factor. Beyond that, expect the two-layer definition: production value is the average value of deliverable supply over the past 5 financial years, and deliverable supply in a year is production plus import. The two layers are what make this a good discriminating question.

• Five financial years for production value; twelve months for liquidity value. Two windows, and this is the commonest swap in the section.
• Deliverable supply includes import. Production alone is not the measure, so a heavily imported commodity is not penalised.
• It is a value, not a quantity. The workbook says average value of deliverable supply, so price changes move the score as well as tonnage.
• Exports do not appear in this definition. Deliverable supply is production plus import, and nothing is subtracted.
• The rule is a 25% floor on each factor, not a fixed 25:75. MCX uses 25:75; a different split respecting the floor would also comply.
• A high production score alone does not earn a place in the index. For AGRIDEX's 2021 basket, constituents were selected from commodities scoring reasonably high on both parameters.
• The workbook names this factor three ways — production value, production score, and production volume in Rupees. Treat them as one thing rather than hunting for a distinction.
• It is measured once, at construction or rebalancing. Because commodity indices are price-based, the weight it produces then stays fixed for the year.