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Informist, Tuesday, Apr. 8, 2025

 

By Pallavi Singhal

 

 

NEW DELHI – Following the government's recent decision to extend the ban on futures trading in derivative contracts of key agricultural commodities by another year, commodity expert and policy commentator G. Chandrashekhar has suggested that the National Commodities and Derivatives Exchange should begin to focus on delivery based forward trading. "They should work on launching delivery based contracts which will reduce the role of speculative capital- government's prime concern," he said speaking to Informist.

 

 

Deliverable futures contracts are the forward contracts to buy or sell a certain underlying instrument with actual delivery of the underlying instrument occurring. A forward contract is a customised contract between two parties to buy or sell an asset at a specified price on a future date. Unlike standard futures contracts, a forward contract can be customised to a commodity, amount, and delivery date.

 

 

In 2021, the government imposed a ban on derivatives trading in seven commodities--non-basmati paddy, wheat, chana, mustard seed and its derivatives, soybean and its derivatives, crude palm oil, and moong--for a year to check rising prices. The ban was extended consecutively each year till December, and extended three more times till Mar. 31, 2026.

 

Government sources Informist spoke to said that the final decision was based on the fact that the Indian market is not mature yet. "We have seen a turbulent year when it comes to agri commodities. At a time when inflation has finally eased, the government did not want to set anything in motion that disturbs it," the official had explained, adding that such trading will only give rise to both internal and external speculation.

 

Managing Director and Chief Executive Officer Arun Raste has time and again said that these seven commodities form 70% of NCDEX's business which was wiped out with the ban. "It is difficult for the exchange to function without them. We would only last a couple years without them and may have to consider shutting down," he had told Informist. 

 

An alternate to this could be Chandrashekhar's suggestion. "The exchange can even launch more contracts of non-agri commodities in line with their steel contract. Moreover, their steel contract must be promoted to gain more volume," he said.

 

NCDEX re-launched its steel futures contract on Jan. 18, 2021, aiming to expand its product offerings by entering the non-agricultural space with steel futures contracts. However, with zero volumes, the contract is currently not being traded.

 

While Chandrashekhar makes a compelling argument, Arun Raste says that for any delivery based forwards to actually work, a much deeper market is required. "The Indian market is shallow and does not have enough participants. Such contracts are unlikely to work," he said. 

 

Commenting on the government's decision to extend the ban, Chandrashekhar said that the futures markets are only a reflection of underlying supply and demand and do not, in anyway, drive price volatility. "Government's belief that futures trade drives up prices is not founded in facts. There are several instances where commodity prices reached a certain level and trade was suspended. However, instead of stabilising or decreasing, prices continued to rise," he said. "When there is genuine shortage, prices will rise. Futures market is only a reflection. By banning this, you cannot augment supplies," he added. 

 

To effectively manage commodity prices and ensure stable supplies, policymakers should focus on improving supply-side management, said Chandrashekhar. 

 

Despite India's long history of commodity derivatives trade, this sector has remained underdeveloped as a result of government intervention in many commodity markets to control prices. Many agricultural commodities production, supply, and distribution are still governed by the state. Some agricultural commodities are restricted from free trade under the Essential Commodities Act. Under the Forward Contracts (Regulation) Act, forward and futures contracts were limited to only a few commodity items until April 2003. However, in 2003, the government had lifted all restrictions on commodities that could be traded on commodity exchanges- till restrictions were put in place again in 2021.   End

 

Edited by Akul Nishant Akhoury

 

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