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Informist, Monday, Nov. 11, 2024

 

By Afra Abubacker and Pallavi Singhal

NEW DELHI – The government must allow futures trade in banned agricultural commodities to restore transparency and for hedging options in the market, according to Commodity Participants Association of India President Sanjay Rawal. The ban on derivative trading of seven agricultural commodities is set to expire on Dec. 20. 

 

"Whenever you have a ban, instead of actually reducing the price, all it does is remove a transparent mechanism by which price transmission can happen," Rawal told Informist on the sidelines of the 10th convention of Commodity Participants Association of India on Saturday. Rawal said the association will support the National Commodity Derivative Exchange in its representations to withdraw the ban. 

 

The government imposed a ban on derivative trading in seven commodities — non-basmati paddy, wheat, chana, mustard seed and its derivatives, soybean and its derivatives, crude palm oil and moong — in 2021 for a year to combat rising inflation. The ban was extended consecutively each year till December 2024.  

 

"The most crucial part is that he (speculator) provides some liquidity at the point of time when the farmer wants to sell it," Rawal said on the role of speculators in the futures market. With no speculators in the market, the farmer has to sell at prices dictated by traders and processors. 

 

Asked about the risk of speculators with no physical exposure to the commodity driving up the prices, Rawal said: "He (speculator) is deploying his own capital, he's taking a risk. Why are we so worried about whether he has exposure or doesn't have exposure?" 

 

Rawal suggested regulations to check market manipulation. "If you are worried about somebody cornering the market and therefore ramping up the price, then put in some stock limits, some position limits." 

 

The position limit is the maximum number of contracts on a single commodity derivatives contract that can be held by an investor or group of investors. It is imposed to preclude any entity from exerting undue control over a particular market. Meanwhile, daily price limits protect investors from sudden and extreme price movements and provide a cooling-off period to re-assess the information and the fundamentals impacting the price of the commodity futures contract.

 

In the non-agri commodity basket, Rawal sees growth opportunities in industrial metals apart from bullion and energy mix. "Copper, zinc, nickel, lead, all of these will make a huge difference if we want to achieve the growth that we think we are capable of," he said. 

 

The government must incentivise derivative trading through reforms in goods and services tax to improve participation in NCDEX, Rawal said.  End

 

Edited by Saji George Titus

 

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