Samir Shah, Managing Director and Chief Executive Officer at NCDEX,talks to Money Today about the need for transparency in gold pricing and the initiatives undertaken to encourage participation from end users in commodity markets

Samir Shah, MD & CEO at NCDEX

"There is need for transparency in gold pricing and the initiatives undertaken to encourage participation from end users in commodity markets"

The government is trying to reduce India's dependence on gold import by tapping into approximately 20,000 tonnes of gold lying in Indian households, temples and trusts, through multiple schemes. What's your take on this?

The intent of the government is well placed. This could ease pressure on the current-account deficit. A small percentage of this stock, if mobilised effectively, could lead to a considerable reduction in gold imports and help India gain self-sufficiency in the category. Several solutions such as the Gold Deposit Scheme (GDS), Gold Exchange-Traded Funds (ETFs) as well as the possibility of setting up a bullion corporation have been implemented with the purpose of mobilising 'under-the-pillow' gold. While the earlier version of GDS has met with limited success, Gold ETFs have actually exacerbated the problem of growing dependency on gold imports. 

The primary requirement for the successful implementation of the government's gold monetisation scheme is a vast infrastructure set-up to facilitate easy and secure handling of gold. To encourage supply of privately held gold into the system, it is essential to upgrade domestic refinery infrastructure, create a marketplace for buying and selling gold, and facilitate transparent price formation.

What has the market response been to your 'Gold Hedge' contract?

Gold Hedge is an innovative futures contract that mirrors international gold prices and gives the investor a simple investment product without the hassle of calculating local premium, making it free of domestic price volatility. Launched in January 2014, it received an encouraging feedback from refiners, exporters and jewellers, including larger bullion physical market participants involved in the import of gold bars and re-export of jewellery. These stakeholders, having significant exposure to international gold prices, need to effectively hedge against any adverse movement in prices. Additionally, it was also appreciated by leading bullion and trade associations.  

How do you see the Gold Futures segment evolving? Have there been any new developments or improvements in this segment?

India has always been a significant player in the international gold market and has a thriving bullion spot and futures market. However, despite being one of the biggest consumers in the world, India continues to be a price-taker in the global market. There is no clear criterion for pricing of gold in India or on the assessment of the premium component embedded in the local price of gold. 

At NCDEX, we have attempted to extend the benefit of transparency to physically delivered gold bars, by introducing an independent gold premium polling mechanism. NCDEX-polled gold premium will connect the prevailing international price of gold with the wholesale value of gold kilo bars in India - the world's largest consumption market. This premium - sometimes a discount - will reflect the logistical cost and market fundamentals affecting gold in India. 

The daily value of the premium or discount, in US dollars per troy ounce, will be based on an independent unbiased survey of banks, traders and dealers in various Indian cities for a kilo bar of fine gold quality 995, available in Ahmedabad. The NCDEX Gold Futures will improve price discovery and further extend the NCDEX bullion suite to meet the growing industry demand to effectively manage price risk. 

What is your vision for the recently launched platform Gold Now?

With the launch of Gold Now, NCDEX is creating an ecosystem that is at par with international standards for the Indian bullion and jewellery industry. Gold Now offers an online, transparent platform to buy and sell gold, backed by the assurance of quality and fair price. The platform accepts gold recycled in exchange-approved refineries as 'Good Delivery'. 

After a year-long exhaustive accreditation process - designed and conducted by three experts of international repute - the Exchange has approved four domestic refineries as 'Good Delivery' on the Gold Now platform. They satisfy the stringent financial, technical and customer due diligence standards established by the Exchange. Gold Now will encourage the local refining industry to develop world-class refining facilities in the country and also incentivise consumers to recycle gold.

The retail investor base is small in India, when it comes to commodity trading. How are you planning to tap into this opportunity? Will NCDEX consider reducing the lot size of gold in the future to make it accessible to retail participants?

We are continuously making it easier for end users and investors to participate in the markets. NCDEX is the first commodity exchange to introduce small-size contracts in agricultural commodities, which are retail friendly. These contracts were designed to address the delivery concerns of retail investors, offering them a product that gives them a flavour of trading in commodities without getting into the intricacies of physical settlement. 

The 2 MT contracts are a replica of full-size contracts (except for contract period and lot size) and enable retail investors to diversify their portfolios. Without the constraints of trying to trade full-size futures contracts on a very limited risk capital trading account, trading smaller contracts gives retail investors the flexibility and opportunity to be a part of the dynamic world of commodities.

For financial players, we offer inter-commodity spread opportunities through our ingeniously designed spread trading engine. We also plan to augment our bullion offering with small-size contracts for retail investors.

With a new regulator at the helm, how do you see the commodity markets evolving in the days ahead? 

The merger of FMC with SEBI is a game-changing moment for both the commodity and financial markets. The governance of the commodity markets is now in the able hands of a regulator who has the proven experience of managing complex market situations. It is an extremely encouraging sign for market participants, farmers, processors and stakeholders in the business, and will help increase investor confidence. 

This milestone event will usher in the next set of reforms, paving the way for stronger risk management systems, broader participation and expansion of products and services. The alignment of the commodity markets with the securities markets will ultimately provide a superior and safer experience to investors.