Commodity Trading in India: Meaning, Market Structure and Key Features

Commodity trading refers to the buying and selling of standardised derivative contracts linked to raw materials such as metals, energy products, and agricultural goods. In India, commodity trading takes place primarily through regulated exchanges and involves futures and options contracts rather than physical exchange of goods.

This article provides a detailed commodity trading guide, explains what is commodity trading, and offers a structured commodity trading market overview relevant to Indian markets.

What Is Commodity Trading?

The answer to what is commodity trading lies in the structure of derivative markets.

Commodity trading involves:

• Trading standardised futures and options contracts

• Speculating or hedging against price movements

• Settling positions before expiry or opting for delivery

Instead of buying physical gold or wheat, traders participate in price movements through exchange-traded contracts.

In India, commodity derivatives are regulated and traded through exchanges such as:

• Multi Commodity Exchange of India (MCX)

• National Commodity and Derivatives Exchange (NCDEX)

MCX mainly lists metals and energy contracts.
NCDEX focuses largely on agricultural commodities.

Types of Commodities Traded in India

Commodities are broadly classified into two categories.

1. Hard Commodities

These are natural resources extracted or mined.

Examples include:

• Gold

• Silver

• Crude oil

• Copper

Prices of hard commodities are influenced by:

• Industrial demand

• Global supply chains

• Geopolitical events

2. Soft Commodities

These are agricultural products that are grown or raised.

Examples include:

• Cotton

• Soybeans

• Wheat

• Spices

Prices of soft commodities are affected by:

• Weather conditions

• Monsoon patterns

• Crop cycles

• Global trade flows

How Commodity Trading Works in India

A basic commodity trading market overview includes the following steps.

1. Selection of Contract

A trader selects:

• The commodity

• The contract month

• The lot size

Each contract has predefined:

• Quantity

• Quality specifications

• Expiry date

These are standardised by the exchange.

2. Taking a Position

Traders can:

• Go Long (Buy) – If expecting prices to rise

• Go Short (Sell) – If expecting prices to fall

Commodity markets allow both directions without owning the physical asset.

3. Margin and Leverage

Commodity trading operates on a margin system.

• Traders deposit a percentage of contract value

• Margin typically ranges between 5% and 15%

• This allows control of larger contract value

Leverage increases exposure but also increases risk.

4. Squaring Off or Delivery

Most retail participants square off positions before expiry.

If held until expiry:

• Some contracts require compulsory physical delivery

• Others may be cash-settled

Delivery rules depend on contract specifications.

Commodity Trading Time in India

Commodity markets in India operate in extended sessions.

Standard MCX Trading Hours

• Start: 9:00 AM IST

• Close: Varies by commodity

Agricultural Commodities

• Usually trade until 5:00 PM

• Some contracts trade until 9:00 PM

International Commodities (Gold, Silver, Crude Oil, Metals)

• Trade until 11:30 PM

• Extend to 11:55 PM during US Daylight Saving Time

Evening sessions align with global markets, especially the US and Europe.

2026 Union Budget: Impact on Commodity Trading Costs

The 2026 Union Budget introduced changes to transaction taxes in the derivatives segment.

Securities Transaction Tax (STT) Changes

• Commodity futures STT increased from 0.02% to 0.05%

• Commodity options STT increased from 0.1% to 0.15%

• Effective from April 1, 2026

The increase raised participation costs in commodity derivatives.

Commodity Transaction Tax (CTT)

CTT remained largely unchanged for commodities.

Transaction costs directly affect net profitability, especially in high-frequency trading.

Advantages of Commodity Trading

Commodity trading offers structural benefits within a diversified portfolio.

1. Diversification

Commodities often behave differently from equities and bonds.
This reduces concentration risk across asset classes.

2. Inflation Sensitivity

Commodity prices often reflect changes in input costs and inflation trends.

For example:

• Fuel prices affect transportation

• Food prices affect household spending

3. Leverage-Based Participation

Margin systems allow exposure to large contracts with limited capital.

Disadvantages of Commodity Trading

Commodity trading also carries specific risks.

1. High Volatility

Prices react to:

• Weather disruptions

• Supply chain issues

• Geopolitical tensions

Price swings can be sharp.

2. Leverage Risk

Leverage magnifies both gains and losses.

Small adverse price movements can impact capital significantly.

3. Operational Complexity

Beginners may find:

• Contract specifications complex

• Expiry cycles confusing

• Margin calls challenging

Understanding product structure is essential.

Commodity Trading for Beginners: Structural Considerations

For those exploring commodity trading for beginners, the key structural aspects include:

• Understanding contract size

• Monitoring margin requirements

• Tracking expiry dates

• Reviewing tax and brokerage costs

Commodity derivatives differ from equity delivery products due to:

• Mandatory expiry

• Higher leverage

• Physical delivery obligations in select contracts

Commodity Trading vs Equity Trading