FINANCIALISATION OF COMMODITIES – EMPIRICAL EVIDENCE FROM THE INDIAN FINANCIAL MARKET

Investing in commodities has gained a lot of mileage globally with their emergence as an alternative asset class with exhibited diversification potentialities when combined with traditional asset classes namely, equity and fixed Income. Over a period of time, the increased institutional investment flows into the market led to the financialisation of commodities which in turn subdued the diversification potentialities that they exhibited initially. Also one strand of literature has blamed this excessive financialisation as the prime driver of increased commodity price volatility. In this background, the current study attempts to examine the financialisation of the Indian commodities market by examining the interdependence between the stock market and its commodities, both in terms of returns co-movements (by using the cointegration and causality framework) and in terms of volatility transmission (by using the GARCH framework) between them. Examining this issue from the Indian policy perspective becomes extremely pertinent with the Indian regulator of the commodities market, the Securities and Exchange Board of India (SEBI), planning to open up the commodities market to institutional investment, which was hitherto not permitted. The study clearly brings out a unidirectional causality, as well as the existence of volatility spillovers, from the stock market to the commodities market.