The need for a raw material repository and its benefits

The increase in the number of retail investors in the Indian market has been unprecedented. Technological advancements have made their way into stock trading which makes the process absolutely convenient for people who can register to trade in the capital market from the comfort of their respective homes. Then, the financial challenges posed to people by the pandemic drove the number up as people looked for other ways to improve their financial security. The increase in the number of retail investors has not only boosted market confidence, but also attracted the attention of investors in different market segments. One such segment of the market is the commodity market.

The commodity market is similar to the capital market where, instead of shares of trading companies, warehouse receipts representing the ownership of commodities, such as metal, gold, silver, agricultural products , are bought and sold. The commodities market trades in the primary economic market rather than manufactured goods. This part of the financial market helps producers, manufacturers, and wholesalers find out the prices of various goods and commodities. As with the stock market, there are three commodity exchanges dedicated to buying and selling – Multi Commodity Exchange (MCX), Indian Commodity Exchange (ICEX) and National Commodity and Derivatives Exchange (NCDEX).

however, is the leading commodity exchange in India, with the highest daily turnover.

What custodians are to securities markets, repositories are to commodity markets. Repositories facilitate the ownership and transfers of commodity assets electronically. Towards this demat, accounts are opened for various customer groups such as farmers, agricultural producer organizations (FPOs), processors, manufacturers, traders, etc. to obtain electronic negotiable warehouse receipts (eNWR) or electronic non-negotiable warehouse receipts (eNNWR). The issuance of electronic negotiable warehouse receipts (eNWR) under a commodity repository is highly regulated, which protects customers from risks such as fraudulent issuance of warehouse receipts without receipt of goods, overstating the value or quality of goods, or falsifying or falsifying information in warehouse receipts, which are usually associated with traditional physical warehouse receipts, etc. All transactions carried out on the repository platform are electronic and secured with an “authorization code” which excludes any possibility of transactions without the customer’s knowledge. Instant emails and SMS are sent to the customer to keep them informed of each update. eNWRs are stored in digital form away from any human intervention, which eliminates any risk of manipulation. It helps depositors gain access to a large number of buyers across the country and easily perform stock transfers online. The repositories are also connected to all major commercial banks to facilitate transparent pledge funding on the back of eNWRs.

Investing in commodities can be a way to diversify your investment portfolio. Given the inverse relationship of commodities with bond and stock prices, it can protect the investor’s capital in the event of a downturn in stocks and bond markets. Investing in commodities can also provide protection against inflation. However, there are risks associated with investing in commodities along the same line of volatility and change in global situations that an investor should be well aware of.

(The author is MD & CEO, CDSL Commodity Repository)

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