BackUnleashing the futures market
Unleashing the futures market
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If there is one market in India that is at the mercy of political whims, it is the futures market. Whenever prices of agricultural commodities spike, there are instantaneous calls to ban trade in this or that commodity in this market.
It is a travesty of facts, but also more as B.C. Khatua, chairman of the Forward Markets Commission (FMC), the market regulator, said on Saturday. He hoped 2011 would be better for the FMC. He has high hopes.
Any well-regulated futures market offering a diversity of trading products (forward contracts, futures, options and other instruments) can go a long way in ensuring price stability. In such a market, farmers, traders, industrial consumers who want to minimize price risks and even speculators are all stakeholders.
Such markets work well as the functioning of exchanges in Chicago, New York, London and elsewhere shows. But in India, a number of factors ensure that the futures market remains hobbled. Take agricultural commodities, for example. Ask any average farmer in any part of the country and chances are that he’s not heard of the futures market. Even if he does, he cannot participate in this market effectively. No sooner has the crop been harvested, than he is forced to sell at the market near his farm. Trading in such a market requires that he has access to storage facilities such as grain silos and modern cold storage. These are essential for “holding power". At the moment, such ideas are closer to dreams.
Then, at the other regulatory extreme, the government bans commodities available for futures trade at the first noise of protest. Sugar is a good example. Sugar futures were banned in May 2009 mainly at the instigation of the Left parties. The ban was later allowed to lapse and late last year sugar futures were allowed once again. The result is that futures trade in agricultural commodities as compared with bullion is sporadic and has grown slowly in the face of policy uncertainties.
What this does is to shunt out actual consumers who want to hedge against prices and farmers from the market. Instead it attracts speculators whom the government is dismissive of. So one good reason to have such a market is defeated because of poorly thought interventions. This is unlikely to abate anytime soon. What can, at best, be hoped is the Bill to empower the FMC to regulate exchanges better will be passed in 2011.
What ails the futures market: Politics or poor regulatory infrastructure? Tell us at views@livemint.com
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