India started the current financial year with an unprecedented slump in the economy in the first quarter, thanks to Corona Virus Pandemic that shut not only the country alone but also the top global economies. While the stress across all the sectors of economy started becoming more evident with contraction of GDP by 23.9%, the Agricultural Sector not only showed the resilience but rebounded sharply posting a healthy 3.4% growth for the Apr-Jun quarter. The country witnessed a revolutionary policy shift during the same quarter with the Centre announcing three game-changer legislations, to transform the agricultural marketing by giving the power in farmers’ hands to decide how, where, when and at what price to sell their produce.
Parallel to this, India also witnessed the launch of the first-ever agricultural index for trading in the commodity derivatives market. The National Commodity and Derivatives Exchange has launched India’s first commodity index “AGRIDEX” for trading on May 25 on its futures platform. After teething trouble, the index quickly managed to not only recover but churn out an excellent returns for investors outperforming key investment benchmarks such as Nifty and Sensex in the stock market, and bullion in commodity sector by a wide margin.
As per the available data, AGRIDEX rose from 1,061 to 1,205 in Aug-Oct quarter, giving 13.7% returns. At the same time Nifty50 and Sensex gave 5.14% and 5.34% returns respectively. Returns on gold and silver were in negative territory of 5.7% and 6.2%, respectively, during the quarter under review. In October, the AGRIDEX was again the top performer with 4.93% returns, followed by Sensex with 4.06%, Nifty50 with 3.51%, Gold and silver with a little below 1%.
The exhilarating performance of AGRIDEX, on smaller volume though, can’t be seen just as a coincidence, but it was a reflection of what happened in the underlying physical assets. Agricultural sector was thriving in export market during the same period. On domestic front, the country witnessed a gradual unlocking across sectors, but agriculture showed a remarkable rebound starting from a record sowing in kharif season. A major transformation in supply chains during lock downs was a key highlight even as more and more consumers opted for e-commerce to buy their groceries including perishables like fruits and vegetables.
Adverse weather created logistical hurdles, crop losses which was reflected in heightened prices with retail food inflation moving much higher than the Reserve Bank of India’s comfort levels. The AGRIDEX, during this period, was able to establish its utility by gauging the price situation in the underlying sectors much more accurately, raising hopes the index is well positioned to become a key tool in the hands of institutions, engaged in agriculture and economic research. The institutional investors, mutual funds and portfolio managers in particular, who have been shunning agricultural commodities so long on account of its compulsory-delivery feature, will also be inclined to allocate at least a small portion of their corpus under the multi-asset funds for this cash-settled index to begin with.
They say that the Investment in agriculture offers an opportunity to participate in India’s economic progress. The sentence may sound bookish or theoretical. But if one correlates the index with the impact of the impending transformation in agricultural sector after recent reforms, change in the mindset of Indian corporate and retail consumers from a price-sensitive consumer to the one who is ready to pay more for quality, and the resultant change in margins of farm goods processors, AGRIDEX is certainly set to become the barometer of the country’s agricultural development.
With Pandemic showing no signs of weakening in Western economies and its scars likely to hurt the world food market longer than initially expected, the world is likely to witness more volatility in food prices, which could have direct or indirect impact on corporate profitability. The cost of capital for corporates may also be impacted as credit rating agencies start focusing more on risk-management capabilities of corporate being rated. On this backdrop, the index can play a major role as tool for a large number of corporate to hedge their risks emanating from volatilities in agri-commodities market.
AGRIDEX tracks the performance of ten top traded farm futures on NCDEX including Soybean, Soyoil, Chana, Mustard, Castorseed, and Jeera among others.