A chartered accountant with an additional degree in law, Ashok Kumar is an avid reader who has yet to read an investment related book.

His expertise stems entirely from grassroots stockmarket and business experiences over the past decade and a half.

His column discusses investment related issues. His earlier column spoke about Investing in art.

While the global financial community at large is well aware of the ongoing boom in the Indian equity market, fewer people are aware of an unusual phenomenon that is taking place alongside.

Strong consumer demand and higher corporate earnings have resulted in the uncommon phenomenon of the Indian commodity and equity markets experiencing an uptrend together.

Although the commodity market -- which includes metals, precious metals such as gold and silver, crude oil, edible oil and foodgrains -- and the equity market are controlled by different factors, they have both been on an ascent in India for two and a half years now, which is contrary to global market trends. 

• How commodity trading works

The equity story...

Strong inflows of money from abroad and improved corporate earnings has resulted in a sensational 70% plus growth in the bell-weather BSE Sensex over the past 12 months.

It is widely accepted that the inflows from the Foreign Institutional Investors are primarily due to the much touted 'India growth story', which pegs India as an alternative to China as an equity investment destination.

Resultantly, there have been huge inflows from countries such as Japan [Images], Korea and Taiwan into the Indian equity market.

And the commodity tale

Interestingly, trading volumes in the Indian commodity market have also seen a steady rise -- from Rs 1,29,000 crore in financial year 2004 to Rs 5,71,000 crore in FY 2005 and well past that in FY 2006.

Commodity trading in India, which was banned in the 1960s, resumed in 2003 through the Multi-Commodity Exchange of India -- MCX -- and the National Commodity and Derivatives Exchange -- NCDEX. The former is slated to hit the Indian markets shortly with an Initial Public Offering.

Excessive liquidity and benign interest rates have been vital for such growth in the two markets in India. The current huge investments in the commodity market by dedicated and hedge funds were not there earlier.

Furthermore, a boom in construction and infrastructure activity fuelled interest in steel and other base metals in rapidly growing economies such as India and China, resulting in a surge in interest in the Indian commodity market.

• How I lost money in commodity trading

It takes two to tango

What is really noteworthy here is the fact that the commodity and equity markets have been moving in tandem, bucking the global market trend.

A growing middle class, with increasing disposable incomes, has led to a hike in consumer spend in India. This fact is reflected amply by the demand for consumer goods in India, which has recorded a double digit YoY growth in the sector in recent times.  

Apart from fundamentals, the introduction of electronic trading in commodities has also fuelled the uptrend and this has coincided with the rise in equity markets. With a GDP growth forecast of over 7.5%, and hopes that a good monsoon this year is likely to fuel robust agricultural output, the market expects the current uptrend in both markets to simultaneously continue.

Although there could be a correction in equity markets due to a slowdown in foreign funds and high crude prices, the trend for commodities still appears healthy. Since the commodity cycle is normally for 10-15 years, the consensus is that a strong demand for commodities will comfortably continue for another 10 years. 

The strong local demand for metals is expected to grow the commodities market and industry by about 7% to 8%; consumer spending too is on the rise. On the other hand, with crude price nearing record levels, there are fears that the equity market could crack in the near term.

While high FII inflows drive the Indian equity market, strong consumer demand boosts the commodity market.

One of the two will have to crack up to adhere to the global phenomenon of having only one of the two markets comfortably outperforming the other at a given point in time.

Whereas it would please Indian investors if the current phenomenon of both markets faring well simultaneously continues, chances are, if one has to crack earlier, it is more likely to be the equity market. Till that happens, enjoy the Indian tango.

This column was written before May 15, 2006, the day the stock market and the commodity market dipped simultaneously.

Ashok Kumar is the founder and CEO of LOTUS KNOWLWEALTH, which aims at knowledge driven wealth creation.