The Indian experience in commodity futures market dates back to thousands of years. References to such markets in India appear in Kautialya’s ‘Arthasastra’. The words, “Teji”, “Mandi”, “Gali”, and “Phatak” have been commonly heard in Indian markets for centuries.

The first organized futures market was however established in 1875 under the aegis of the Bombay Cotton Trade Association to trade in cotton contracts. Derivatives trading were then spread to oilseeds, jute and food grains. The derivatives trading in India however did not have uninterrupted legal approval. By the Second World War, i.e., between the 1920’s &1940’s, futures trading in organized form had commenced in a number of commodities such as – cotton, groundnut, groundnut oil, raw jute, jute goods, castor seed, wheat, rice, sugar, precious metals like gold and silver. During the Second World War futures trading was prohibited under Defence of India Rules.

After independence, the subject of futures trading was placed in the Union list, and Forward Contracts (Regulation) Act, 1952 was enacted. Futures trading in commodities particularly, cotton, oilseeds and bullion, was at its peak during this period. However following the scarcity in various commodities, futures trading in most commodities was prohibited in mid-sixties. There was a time when trading was permitted only two minor commodities, viz., pepper and turmeric.

Deregulation and liberalization following the forex crisis in early 1990s, also triggered policy changes leading to re-introduction of futures trading in commodities in India. The growing realization of imminent globalization under the WTO regime and non-sustainability of the Government support to commodity sector led the Government to explore the alternative of market-based mechanism, viz., futures markets, to   protect the commodity sector from price-volatility. In April, 1999 the Government took a landmark decision to remove all the commodities from the restrictive list. Food-grains, pulses and bullion were not exceptions.

The long spell of prohibition had stunted growth and modernization of the surviving traditional commodity exchanges. Therefore, along with liberalization of commodity futures, the Government initiated steps to cajole and incentives the existing Exchanges to modernize their systems and structures. Faced with the grudging reluctance to modernize and slow pace of introduction of fair and transparent structures by the existing Exchanges, Government allowed setting up of new modern, demutualised Nation-wide Multi-commodity Exchanges with investment support by public and private institutions. National Multi Commodity Exchange of India Ltd. (NMCE) was the first such exchange to be granted permanent recognition by the Government

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