Indian Commodity Futures Market: The convergence of Future and Spot Price with the effect of Contango and Normal Backwardation

Abstract Indian commodity market has wider experience on price risk management through various derivative products. But in the same time we have unseen the relish of “Risk Premium”. In this paper we have emerged in exploring the existence and randomness of Contango and Normal Backwardation. We have focused on NCDEX and MCX for our data crunching and analyzed eight commodities including both Agricultural and Metal over six years period i.e. from 2010 to 2015. As we know, the “Near Month” contract are more volatile and sensitive as it is performs its activity on maturity month, so we have crunched “Near Month” contract for both Spot Price and Future expected Spot Price for our analysis. As a result, we are able to make out the existence of Contango and Normal Backwardation in both Agricultural and Metal segment, and seen the metal has more randomness than agricultural commodity. The metal segment have a Contango pattern and hence showing a Normal market condition over six years period, whereas except Soya bean, other four commodities i.e. Channa, Chilli, Jeera, Turmeric has a Backwardation pattern and hence treated as Abnormal Market Condition over six years' time horizon. Keyword: Commodity Futures, Contango, Normal Backwardation, Keynes Assumptions.