By Vipin Agnihotri
Future trading has finally arrived in India but the need of the hour is stricter control over it. In terms of statistic, the daily turnover at India's three commodity exchanges is more than Rs 15,000 crore.
Future trading gives a much-needed cushion to parties to buy or sell a commodity with expectation of a certain price at a future date. However, point to be noted here is that a large chunk of transactions in futures trading are offset prior to maturity by entering into fresh contracts on the basis of prevailing prices.
Not only future trading assist the seller in getting a better price but also allows buyers to hedge price risks in commodities like gas, crude oil and agriculture produce. Banned in India till 2003, the Indian government grants permission to futures trading in farm products as part of agriculture sector reforms so that farmers can get better prices.
According to experts, future trading was expected to throw up new price trends and more importantly encourage farmers to sow crops on the basis of market demands. It is worth mentioning in this regard that India is a leading producer of agricultural commodities such as wheat, rice, sugar, edible oil, spices and pulses. Indian government was quite hopeful that future trading would help the country benchmark prices for lots of these commodities. This, unfortunately, has not happened.
Majority of people that are involved in commodity trading work on price arbitrage on the basis of contracts on international exchanges. In other words, they make money buying and selling commodities on the basis of international prices. India has not much of a role to play as the actual price discovery happens in the international markets. Furthermore, the advantages derived from these routines are also pretty much limited to individual traders, while the country gains nothing in the whole exercise.
The pivotal factor here is that in few commodities India is a net price taker, rather than a price maker. Therefore, one can safely say that it works on speculation, which is present in any futures market. According to sources, the price arbitrage happens illegally despite the Indian government and the Reserve Bank of India trying to check it.
In my opinion, the main issue with the Indian market is that it has very little depth, which allows even small number of operators to manipulate prices, and the regulatory environment has not given it scope to expand.
No one will argue with the fact that expansion of the Indian futures market is going to benefit both farmers and the country but it’s the responsibility of government to put in place a regulatory mechanism which can check speculation that leads to increase in prices.
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