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Commodity trading in India can be done either for speculation or for actual receipt of goods. While most traders square off their positions before expiry, certain contracts are settled through physical delivery, meaning the underlying commodity is actually delivered to the buyer. Physical delivery is a term in an options or futures contract which requires the actual underlying asset to be delivered upon the specified delivery date, rather than being traded out with offsetting contracts. This process ensures transparency, market discipline, and price discovery based on real demand and supply. In this article, we explore what physical delivery means, how it works, and what traders must keep in mind.
Physical delivery is a settlement method where the actual underlying commodity is delivered to the buyer upon contract expiry. This contrasts with cash settlement, where only the price difference is paid.
Imagine you're a trader in Gujarat who buys a futures contract on NCDEX to purchase 10 tonnes of soybeans at ₹4,000 per quintal. If you hold the contract until expiry, the seller must deliver the soybeans to an exchange-approved warehouse, such as one in Indore. You take physical possession based on the contract terms.
Final Payable Amount = (Contract Price × Quantity) + Delivery Charges (if any) + Applicable Taxes and Levies
Physical delivery comes into play under specific circumstances, such as:
Scenario |
Example |
|---|---|
Trader holds a commodity contract till expiry |
Gold futures contract on MCX |
Contract specification mandates delivery |
Agro commodities, metals like zinc or aluminium |
Trader chooses not to square off the position |
Leads to compulsory settlement via delivery |
Most Indian exchanges like MCX (Multi Commodity Exchange) have specific contracts designated for compulsory delivery.
Trader buys or sells a commodity futures contract marked for delivery.
If the position is not squared off before expiry, it enters the delivery phase.
The exchange designates warehouses (registered with WDRA) for commodity storage
Buyer receives a warehouse receipt
Seller is expected to deposit the commodity in the specified warehouse within a set timeline
The commodity is tested for quality and grade. Only exchange-approved grades are accepted.
The buyer makes the full payment
The seller gets credited post delivery confirmation
The buyer may collect the commodity physically or keep it in warehouse storage
The physical delivery process for commodity futures involves several key steps, as outlined below:
Commodity |
Delivery Exchange |
Typical Delivery Centre |
|---|---|---|
Gold |
MCX |
Ahmedabad, Mumbai, Delhi |
Silver |
MCX |
Ahmedabad, Mumbai |
Crude Palm Oil |
MCX |
Kandla |
Cotton |
MCX |
Rajkot |
Zinc |
MCX |
Mumbai |
Physical delivery in commodity trading offers several benefits, including:
Advantage |
Benefit |
|---|---|
Real Ownership |
Trader receives actual commodity |
Transparent Pricing |
Based on real supply-demand and quality standards |
No Reliance on Market Price Movements |
Final settlement is linked to physical product |
Useful for Hedgers |
Farmers, producers, or manufacturers get actual inventory |
While physical delivery has advantages, traders should also be mindful of associated challenges, such as:
Challenge |
Explanation |
|---|---|
Storage Costs |
Commodities must be stored in exchange-accredited warehouses |
Transportation |
Buyers must handle logistics to move commodities post-delivery |
Quality Disputes |
Only certified grades are accepted to prevent issues |
GST and Charges |
Applicable on physical delivery, affecting cost and profit calculation |
Several risks are inherent in physical delivery contracts, including:
Non-standard Grades Rejected: Sellers must ensure the commodity meets exchange specifications
Expiry Penalties: Traders not intending for delivery may incur penalties if not squared off in time
Liquidity Risk: Contracts with compulsory delivery may be less liquid closer to expiry
Physical and cash settlements differ in several key aspects, as outlined below:
Feature |
Physical Delivery |
Cash Settlement |
|---|---|---|
Delivery |
Actual commodity |
Monetary difference |
Involves Warehousing |
Yes |
No |
Regulatory Burden |
Higher |
Lower |
Suitable For |
Hedgers and manufacturers |
Speculators and short-term traders |
Physical delivery is suitable for specific market participants, including:
Farmers and producers seeking market-linked pricing
Jewellers or metal manufacturers who need actual raw materials
Large commodity traders looking to arbitrage between spot and futures market
MCX regulates physical delivery through clear guidelines, including:
Contracts are marked as “Compulsory Delivery” or “Both” (optional)
Physical delivery is done at designated delivery centres
Minimum lot size and quality specifications apply
Physical delivery in commodity trading is more than just a financial transaction—it's a bridge between virtual trades and real-world goods. While most traders choose to square off positions, understanding how delivery works is crucial, especially for hedgers and bulk commodity participants. It ensures that futures trading remains anchored to actual market fundamentals and fosters credibility in commodity exchanges.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
No. Only specific contracts are marked for compulsory delivery. Others can be squared off or cash settled before expiry.
Yes, but it involves warehousing, taxation, and logistics. It is more suitable for businesses that need the actual commodity.
If the contract is for compulsory delivery, you may be assigned a delivery obligation, and non-compliance can lead to penalties.
Yes. Commodities are tested at the warehouse, and only exchange-approved grades are accepted for delivery.
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Posted on 18 Aug
Geetanjali Lachke
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