Current Status of Gold Futures on the IIBX
Since the launch of gold futures in June 2023 on the India International Bullion Exchange (IIBX) located in Gujarat’s GIFT City, the trading volume in the derivatives segment has remained disappointingly low. Despite this, the exchange has seen strong performance in the spot gold market. Jewelers, eyeing the potential for hedging against price fluctuations, have expressed interest in using gold futures. However, the lack of trading volume limits their ability to effectively utilize these tools.
Market Makers: The Key to Liquidity
According to IIBX insiders, jewelers are eager to engage with gold futures products for risk management purposes but are currently hampered by the absence of market makers essential for providing liquidity. Market makers are crucial players who offer two-sided quotes, facilitating smoother trading processes. The expectation is that trading volumes for gold futures will only see a significant uptick once brokers and foreign banks participate actively in the exchange, providing necessary two-way price quotes.
Challenges in the Banking Sector
Experts indicate that banks remain hesitant to engage with gold futures due to the internal adjustments required, including developing an appropriate risk management framework and receiving board approvals. These processes can significantly delay participation. IIBX Managing Director Ashok Kumar Gautam has acknowledged that volume growth does not happen overnight following the launch of new futures contracts. He notes that trading and clearing members are making arrangements with IT vendors to enhance their systems to support these transactions.
Real-Time Trading for Clients
Once fully operational, trading members will soon be able to offer derivative trading to clients. There is a strong demand among clients for banks authorized by the Reserve Bank of India (RBI) to enable them to hedge their gold prices on the IIBX and process margin money. Additionally, trading members are actively developing application programming interfaces (APIs) that will provide real-time price updates, enhancing the trading experience for clients.
The Knowledge Gap in Hedging Practices
Naveen Mathur, the Director of Commodities and Currencies at Anand Rathi, points to a broader issue—the lack of awareness about hedging mechanisms in India. Unlike markets in the U.S., where a significant portion of derivatives trading (around 70%) is devoted to hedging, Indian traders show reluctance to use derivatives for risk management. This knowledge gap poses a barrier to enhancing the adoption of gold futures for hedging. Notably, since its inception in 2022, spot gold trading volumes have significantly increased, indicating a strong market interest despite the challenges faced by the futures segment.
Conclusion
The IIBX is at a critical juncture in its development of the gold futures market. While interest exists, the successful uptake depends on addressing liquidity issues through the involvement of market makers and increasing understanding among potential users about the benefits of hedging with derivatives. As technological advancements and market integrations improve, there is hope that gold futures will find their footing in India’s commodity landscape, complementing the healthy performance of spot gold.
