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Informist, Monday, Jul 22, 2024

MUMBAI – The government must carefully choose commodities for derivatives trading, and ensure minimal intervention in this segment, according to the Economic Survey 2023-24 (Apr-Mar), tabled in Parliament today. "Once the regulators provide clear direction regarding the choice of commodities, they must stay the course by adopting a stable policy with minimal interventions," it said.

Pointing out that the government has in the past banned futures trading in some commodities to control food inflation, it said that such steps have also had implications on the traded value and price volumes on Indian commodity and derivative exchanges.

"The commodity futures market can effectively contribute to price discovery only when many consumers, producers, traders, and aggregators use these markets to hedge their risk. The interplay of these participants, speculators, and arbitrageurs provides liquidity and helps price discovery for longer periods," the survey said. 

However, the Indian commodities futures market lacks depth because Indian farmers are marginal players with fragmented land holdings. Hence, "they are often left without the necessary wherewithal to engage/participate in these markets effectively, leading to reduced depth in the Indian commodity futures market".

The need for standardised exchange contracts with specified quality parameters and delivery requirements has impeded many farmers from participating in the market. They produce different varieties of commodities in widely varying qualities due to varied geographical, weather, and soil conditions, the survey pointed out.

About the way forward, the survey said, citing studies, that the regulator may select those commodities for futures trading for which there is a possibility of futures trading affecting inflationary expectations, and insulate them from such trading.

Sensitive commodities such as common rice, wheat, most pulses, and others may be kept outside the ambit of the futures market "until the markets are developed and the regulator has a higher degree of comfort in diversifying the portfolio". The agriculture futures market may focus on less sensitive commodities like oilseeds, meals, oils, maize, cotton, basmati rice, and spices, it said.

According to the survey, on Mar 1, the government expanded the list of commodities eligible for derivative trading to 104 from 91. The new commodities included apples, cashews, garlic, skimmed milk powder, white butter, weather, processed timber products, and processed bamboo products.

Emphasising the role of farmer producer organisations in promoting futures trading in commodities, the survey said the role of the government, the Securities and Exchange Board of India, and commodity exchanges in promoting FPOs in various segments of agri-commodities across the country was pivotal. "Skilling and hand-holding the FPOs through financial literacy initiatives can go a long way in encouraging the farmers to benefit from the Agri-derivative markets."  

Moreover, as the depth and liquidity in the agri-derivatives market increases in the long run, banning futures trading may no longer be required to stabilise prices unless there is data-backed evidence of futures trading driving up price volatility, it said.  End

Reported by Abhijit Doshi

Edited by Avishek Dutta

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