There is no evidence that derivatives trading leads to higher prices or the suspension affects bringing down the price vitality, according to the latest study done by a group of academicians from prestigious institutions including the Indian Institute of Management, Udaipur.
“The price movements in commodities with no futures are uncontrolled and likely to be more volatile than commodities that have a footprint in the derivatives segment as they are bound by position limits, margin requirements, and daily price limits,” the research paper titled “The impact of the suspension of commodity derivatives on the Agri ecosystem” noted. The study has been conducted by Prof. Nidhi Aggarwal from IIM Udaipur Tirtha Chatterjee from Jindal School of Government and Public Policy and Karan Sehgal, a research scholar.
The research initiative was carried out on behalf of NCDEX Investors Protection Fund Trust. The key objective of the project was to understand how various policy decision impacts the development of spot and derivatives markets taking into account the international case studies and how derivatives can substitute or complement the key policy issues.
While, the Indian government has so far suspended 17 futures contracts since 2005, some of them even thrice amid inflationary expectations, not a single such instance has been recorded in the other parts of the world, the study said. Smaller countries such as Nepal and Myanmar have been promoting the derivatives market and hedging by setting up exchanges, it adds.
The study also enumerated the fact that India has lost the opportunity to become the price setter in the wake of changing dynamics of the agri-commodities market post-pandemic. The suspension of futures trade makes the country dependent on international markets like the Chicago Board of Trade (CBOT) or InterContinental Exchange (ICE) for reference prices, it said citing the example of sugar.
The research tea has studied in detail price movements and other information of two suspended commodities such as Mustard and Chana as their demand is largely met via domestic supply. It also used statistical tools such as Synthetic Control Analysis to broad-base the research for better results.
Highlighting the contradiction in policy responses to price volatility in agri-commodities, the study noted that while India suspended nine derivatives contracts in two phases, China has allowed options trading in Soybean and Soy oil, which were part of the suspended bouquet.
Going beyond the impact on price discovery and risk management practices, the study further finds that suspension of futures hinders the growth in quality warehousing network under the WDRA’s (Warehousing Development and Regulatory Authority) control which endures the transparency, traceability of commodity stocks through e-NWR (Electronic Negotiable Warehouse Receipt).
“The development of a globally competitive agri- derivatives market should be our national priority. It is time that the suspension is reviewed on an urgent basis and the development of the agri-derivatives market is supported in India. The temptations to impose a ban and reverse the gains achieved over several years must be resisted,” the study said in a conclusive statement.
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