The unique initiative undertaken by the exchange NCDEX to launch India's first Agricultural Futures Index has taken the Futures market by storm. A basket of 10 most liquid Agri counters traded in NCDEX across all sectors is taken with proper weightage. This index is traded on the NCDEX platform. Pulses, Guar, Oil complex and fibre are all given due weightage so that no particular sector/commodity may weigh on the sentiments of the Index.
When volumes of individual commodities have remained subdued due to lack of trading activities in the mandis, AGRIDEX has had negligible impact of such factors. The only factor that is important for the index is the overall market sentiment for the Agri sector. Thus, if, for e.g., Chana mandi is closed but other commodity mandis are open, we may find low trading activities and volumes in Chana Futures as a commodity. But trading in Agridex and its volumes will in no case be affected due to that, as other counters move the Index.
The strong positive factors that are expected to push Agridex volumes a great deal is that the 'inherent' fear associated with trading in Agri commodities are not at all present in the Index. Fears of de-listing, quality-related issues, individual counters hitting upper/lower circuit and lack of knowledge of Agri commodities have all been taken care of by this Index. It will not be affected by any of these factors.
The only point driving the index will be the overall market sentiments for the Agri commodities. Thus even if a particular commodity keeps hitting upper/lower circuit in a particular day, the impact on the Index will be nominal only, as that is just 1 of the 10 counters in the Index.
Similarly, there are no issues with the delivery aspects as the Index is cash-settled. The overall volatility too is expected to be lesser than individual counters and thus is expected to carry a lesser risk. With an initial margin of Rs 30,000, this too is very much on the lower side. Thus, it would be attractive for both large and smaller clients. Again the index can be used as an effective hedging tool in the futures market and can be used for diversification and risk management effectively.
Now, we come to the expected trend for Agridex. As mentioned, this Index takes into account the only factor for Agri markets – the overall sentiments for Agriculture.
Our analysis for the Agri market sentiment and the price movement for the index:
-The last few months have seen prices fall for most Agri commodities – not due to its own inherent fundamental factor but because of slow trading due to Coronavirus. Most mandis were closed/had limited trading activities.
-As mandis gradually open, we expect prices to find some support here. Exports, that had been the most adversely affected, could recover strongly – leading to firmness in prices.
-Harvesting is over. Prices are at very low levels. Any recovery in demand from re-opening of mandis could lead prices to move up.
-The recent update on the delayed arrival of Monsoon could lead to long term Bullishness in prices. However, Monsoon and its progress remains a very critical factor for the price movements over the next 4-5 months. Lower rains, delayed arrivals and slow progress of Monsoon are Bullish factors.
-An expected rise in MSP (Minimum Support Price) could support Agri prices further as Government is likely to take more steps to ensure higher remuneration for farmers.
-Bumper foodgrain production report may pull prices down but for short-term only.
-Any rise in sowing area could be a bearish factor for the prices. But the recent shifting in large scale of migration workers due to COVID-19 may well adversely affect the sowing of kharif crops. This is a Bullish factor for prices.
-2nd Phase of Agricultural reforms recently announced by Government may well pave way for a revolution in this sector.
-Amending Essential Commodities Act to virtually scrap Stock limits is bullish for the market
-Allowing barrier-free interstate transportation and opening new markets for farmers all-over India could ensure more remuneration for farmers – again Bullish for the sector.
-Rs 1 lakh crore package on infrastructure, transportation and storage (among other things) is providing long term benefits for this sector.
-After the unfortunate incident of Coronavirus, India has emerged as a global leader in fighting this pandemic. It has earned goodwill, globally, through supplying crucial medicines and other items to both its smaller neighbours and even to the US. There are reports of global Companies thinking of shifting base to India. Amidst food crisis caused by the pandemic, the role played by India (having excess food stocks) will be crucial.
-India being the major producer, consumer and exporter of most agri items, there can be a good possibility of very high investments in this sector. We expect more favourable announcements by the government in this regard.
Short to medium to long term view remains bullish based on the above factors.
Technical levels for Agridex June:
The support is seen at 1,028 and 1,012 while resistance is 1,060 and 1,100 levels.
The author is VP Retail Research at Religare Broking.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.