Knowledge Wire: Construction of Commodity Indices

Globally, commodity indices are constructed using different methodologies in terms of selection of constituents, assignment of weights, frequency of rebalancing, etc.

For MCX iCOMDEX indices, the constituent futures selected are those which represent commodities that are significant to the Indian economy and have adequate liquidity on MCX. The constituents’ inclusion criteria is given by SEBI guidelines, which mandates that the constituents should have been traded for at least 90 percent of trade days during last one year, and have a minimum average daily turnover of Rs.75 crore for agricultural and agri-processed commodities and Rs. 500 crore for other commodities. This turnover criteria apply to constituents with at least 80 percent of the combined weights in a composite index.

For the MCX iCOMDEX index family, constituents found eligible for inclusion in the composite index are also considered eligible for inclusion in the sectoral indices.

In constructing the MCX iCOMDEX Composite Index, ‘Economic Significance’ (measured in terms of each commodity’s deliverable supply in India in the last five financial years) and ‘Liquidity Value’ (measured in terms of the total traded value of the futures contract on MCX in the last one year) are assigned 25 percent and 75 percent weights respectively.

Starting with the initial weights so obtained, the final weights are arrived at by excluding constituents whose weights are below a threshold, assigning caps and floors to individual constituents and re-distributing the excess/ shortfall to/ from the other constituents.

Accordingly, the weights (from January 2020) of the constituents of MCX iCOMDEX Composite Index are as below:

Note: Figures are rounded off

For sectoral commodity indices, weight for each constituent is derived from that of the composite index, on a pro-rata basis, with separate caps applied.

The weights (from January 2020) of the constituents of MCX iCOMDEX Bullion Index and Base Metals Index are as below:



Note: Figures are rounded off

How are the values of commodity index computed? Watch out this space next week ….

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