Indian Commodity Derivatives Market and Price Inflation

Abstract

Since its revival post-1991, commodity derivatives trade in India had experienced explosive growth, both in volumes and value over the years across all contracts that were in operation for major agricultural commodities, metal and energy. However derivatives trade in agricultural commodities was confronted by a major crisis when the Government of India imposed a temporary ban on futures trading of selected items in 2007-08 as part of its anti-inflationary measures. But given the insignificant volumes of trading in commodity futures of all the recently banned commodities it is often argued that futures trading cannot and do not have any direct impact on price rise of these commodities. However test on existing data reveals that the effect of futures prices on spot prices for different commodities differs which implies that there is no uniform impact of commodity derivatives trading on the spot prices of the wide assortment of commodities that are traded. This actual unfolding of events vindicate the position that inflationary pressures stems from a number of factors, including supply side constraint, the global rise in prices of food and oil, the diversion of land for bio-fuel production, loose monetary policy in emerging economies, and the adoption of an expansionary fiscal policy. Hence the policy of across-the-board restriction of derivatives trading in agricultural commodities appears to be unjustifiable, inequitable, and counter-productive.