Commodity Transaction Tax (CTT): Nature of Correlation Dynamics and Volatility Linkages Between Indian Commodity and Equity Markets

Commodity Transaction Tax (CTT): Nature of Correlation Dynamics and Volatility Linkages Between Indian Commodity and Equity Markets

Swamy Perumandla (Madanapalle Institute of Technology and Science (MITS), India) and Padma Kurisetti (National Institute of Technology, Warangal, India)
Copyright: © 2021 |Pages: 21
DOI: 10.4018/ijabim.20210401.oa2
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This study aims to examine the time-varying correlations and volatility linkages between commodity and equity markets before and after the implementation of the commodity transaction tax (CTT) in India in 2013. The study utilizes symmetric and asymmetric DCC-EGARCH model to estimate correlation dynamics. Evidence suggests that the volatility and dynamic correlation linkages between commodities and equity markets are significantly affected by the triggering events. The time-varying correlations of Comdex-Nifty 50 show an unintended steep decline in the post-CTT period. It is an indication of a “flight to quality” phenomenon, where investors move capital from non-agricultural commodity futures to other cross markets and international markets. However, DCC of Comdex-Dhaanya pair is highly volatile in the post-CTT period and also noticed an increased correlation and volatility between the Dhaanya-Nifty 50 pair. Moreover, the correlation dynamics reveal a certain degree of interdependence between the cross markets, which are lower especially during the triggering episodes.
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The futures trading was launched in Indian commodity markets with the essential twin objectives of efficient price discovery and better price risk management, which would bring benefits to farmers, investors, and consumers. The derivatives trading commenced in the securities market in June 2000 and it has been growing at high speed, while the commodity derivatives markets, which has been operational since 48 years and still in a nascent stage. However, subsequent few years have witnessed significant changes in the commodity spectrum despite several institutional constraints. Significant reforms have initiated in commodity futures markets in India since the last few years. The government of India implemented the Commodities Transaction Tax (CTT) of 0.01% on non-agricultural commodity futures contracts like gold, copper, and oil on 1 July 2013. However, the agricultural futures contracts were exempted from CTT. This tax is in line with the earlier tax imposed on transactions in the Securities Market, the Securities Transaction Tax(STT). The difference between the STT and CTT in India is that STT is imposed on both buyers and sellers whereas CTT is levied on non-farm commodity derivatives and the tax is payable by the seller only. However, the STT had no negative impact on the securities markets, which have witnessed tremendous growth in both cash and derivatives segments. Due to the key role of commodities in hedging stock portfolios, most of the studies concentrate on the estimations of the timevarying comovements and the evaluations of hedging effectiveness across several estimation techniques (Arouri et al., 2011; Sadorsky, 2014; Kang, Mclver, & Yoon, 2016; Mensi et al., 2013). However, these studies ignore the transaction costs.

The rationale for introducing CTT was to bring commodity market on par with the securities market where a STT levied. Finance Minister Mr. Chidambaram (2013) stated, that “There is no distinction between derivative trading in the securities market and derivative trading in the commodities market, only the underlying asset is different”. Imposition, of these taxes, aims to reduce the price volatility and increase tax revenue, whether it can achieve the objectives is debatable and questionable since the levy of the tax adversely affected the traded volume of the contracts. Pavaskar, M. &Ghosh, N. (2008) Even as a source of revenue to the exchequer, ctt is a short-sighted move.

The performance of the Indian commodity derivatives market can discern from the movement of the benchmark indices–MCX Comdex and NCDEX Dhaanya. MCX Comdex is 10 Agri commodities represent a composite index of three sub-indices, i.e., MCX Metal, MCX Energy, and MCX Agri indices, NCDEX Dhaanya.

Table 1.
Exchange-wise Traded Value in Commodity Futures from 2004 to 15-16 (Rs. lakh crore)
YearMCXNCDEXOthersTotalGrowth (%)
2004-051.7 (29.0)2.7 (46.5)1.4 (24.5)5.7342
2005-069.5 (44.2)10.9(50.6)1.1 (5.2)21.6273.7
2006-0722.9 (62.4)11.6 (31.7)2.2 (5.9)36.872.3
2007-0831.3 (76.9)7.7 (19.0)1.7 (4.1)40.710.6
2008-0945.9 (87.4)5.3 (10.2)1.3 (2.4)52.529.1
2009-1063.9 (82.3)9.2 (11.8)4.5 (5.9)77.747.9
2010-1198.4 (82.4)14.1 (11.8)7.0 (5.8)119.553.9
2011-12156.0 (86.0)18.1 (10.0)7.2 (4.0)181.351.7
2012-13148.8 (87.3)16.0 (9.4)5.7 (3.3)170.5-6
2013-1486.1 (84.9)11.5 (11.3)3.9 (3.8)101.4-40.5
2014-1551.8 (84.0)9.0 (14.7)0.8 (1.3)61.7-39.2

Figures in brackets refer to the percentage share in total. Growth % represents Year Over Year growth.


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