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A Modest Proposal regarding Subsidies. Foreign Investment and Land Acquisition: The party agreeing to buy the commodity in the future is the buyer of the futures contract, and the party agreeing to sell the commodity in the future is the seller.
Futures commodity contracts are for standardised quantities and standardised qualities of particular commodities. Unlike forward contracts,these are always traded in commodity futures exchanges. Let us say an oilseeds grower anticipates a good crop nationwide and plentiful supply. He may sell three-month oilseeds futures in order to protect himself against a decline in prices by the time he brings his crop to the market.
Speculators, on the other hand, gamble on the movement of prices: How to trade in commodity market in india make a profit on the difference between the spot price and the price at which they have bought the futures. In theory, the objective role of speculators is to bring enough liquidity into the market for it to function smoothly, as their operation ensures that there are enough buyers and sellers for the hedgers to be able to pass on their risk.
However, it is well known that the overwhelming bulk of trade is carried on by speculators, and is many times the value of the underlying commodities.
The eventual settlement of the contract generally does not take place by means of physical delivery, but by settling in cash the difference between the contract price and the spot price prevailing on the date of expiry of the contract. Futures trading is not new in India. However, divergent positions on futures trading have of late been a topic of public debate, especially in the context of rising prices of essential foodgrains, farmer-distress, and the failure of State policies to combat the above.
A particular target of criticism is the operation of futures markets in agricultural commodities, and especially in cereals, pulses and other essential food items, especially with regard to re-opening futures markets for essential food items which earlier had been de-listed.
In India, trade in agricultural commodity futures has taken off sincerising from Rs 0. Futures trading is supposed to reduce risks for buyers and sellers by minimising uncertainty: Risks are also supposed to get reduced with how to trade in commodity market in india pre-set, thus helping participants in the market to know how much they will need to buy or sell.
It is also claimed that the ultimate cost to the retail buyer will be less, because, with less risk, there is a smaller chance that suppliers will jack up prices to make up for losses in the cash market. Proponents of futures trading further claim it allows risk sharing among various market participants. For example, farmers can ensure remunerative prices by selling their produce with futures contracts. Similarly, the trader can buy futures to hedge against volatile prices, thus hedging the carrying risk to ensure the smoothing of prices for seasonal commodities round the year.
However, those who question the virtues of unbridled trade in commodities in the futures market argue as follows: Critics point out that when there is bad news about future supply, speculators start hoarding commodities and hence artificially drive up the prices. Echoing the differences in the how to trade in commodity market in india views on futures trading in commodity markets, the official position in India on futures markets has been subject to frequent reversals, with the opening of futures trade in specific items often followed by their de-listing, or vice - versa.
However, one can notice a consistent pattern in the official policy to open such markets since the beginning of the major economic reform in the country in the year The first of these moves in the post-reform period was inwith the appointment of an official committee on futures trading in how to trade in commodity market in india markets headed by K.
The report, submitted inrecommended the opening up of futures trading in 17 major commodities. But it did not favour the opening of futures markets in wheat, pulses, non- basmati rice, tea, coffee, maize, vanaspati and sugar essential food items of daily consumptionunless the market in the respective commodity was found stable in terms of a case by case study.
In response to the policy changes following the majority recommendations of the Kabra Committee, several Nation-wide Multi-Commodity Exchanges NMCE have been set up, especially sinceusing modern practices such as electronic trading and clearing. And inthe official National Agricultural Policy, pronounced a similar view. Notwithstanding this, ina new committee on the futures market the Guru Committee recommended against allowing an unbridled opening of futures in all commodities, many of which, it held, were not fit for futures trading.
It suggested a case-by-case approach, a decision on which could be left to individual commodity exchanges, provided the specific case fulfilled all of the five pre-conditions laid down by the committee. These conditions included the availability of a large marketable surplus, storability and standardization of the commodity, volatility of price and absence of controls.
The surge in food prices, continuing unabated, in spite of the slow rise or almost a stationary level of the Wholesale Price Index WPIled the Government to appoint a new committee on commodity futures markets. Contrary to the notion that futures trading helps in managing risks and discovering prices, the committee in its final report of 5 doubted that futures can provide hedging facilities to all in the market and especially for the small traders. It suggested that a case for futures trade should rest in providing benefits to farmers who produce the traded commodities.
However,in a supplementary note, the committee drew attention to rising international commodity prices as a factor behind the rising spot market prices for agricultural products in different countries, including India.
It may be noticed that this argument weakens the case against future trade as a factor causing price rise in commodities. Stressing the need to insulate the prices of essential food items in the country, the note emphasized the need for revamping the public distribution system PDS and hiking the Minimum Support Price MSP in order to ensure supply from farmers.
The fact that these market participants do not trade on the basis of fundamental supply and demand relationships and that they hold, on average, very large positions in commodity markets, implies that they can exert considerable influence on commodity price developments. Both of those, as pointed out by UNCTAD, were related to the financial market boom, which was recently followed by a crash. Official policies in India on futures trading in commodities since To recount the changes in official policies relating to commodity futures in India during the liberalisation years post The first major move was the opening of commodity futures for 17 commodities, as recommended by the Kabra Committee in with suggestions for further opening for how to trade in commodity market in india items.
Another 7 were added to the list in The futures market in commodities got a boost in how to trade in commodity market in india the opening of the futures market for 54 commodities, including those sensitive items wheat, rice, sugar and potato in which trading was earlier banned. With rising prices the WPI at Reversing the mood, sugar, oil, rice and potato were added to the list in These four were subsequently delisted in In a similar vein, Government of India banned future trading in chanapotato and soya oil in May in an attempt to contain the price rise in essential commodities and curb the spiralling inflation rate in the country.
The year began with the revocation of the suspension of futures trading in four of the eight commodities, namely, chana, soy oil, rubber and potato, in December This was followed by the revocation of suspension of trading in wheat in May All in all, over a length of time, a process of opening futures market for agricultural commodities has been witnessed over the last several years, with 95 commodities including some food articles continuing with futures trade in — The direction how to trade in commodity market in india official policy is clear.
Food items which in recent years have been traded in futures markets include, among others, coffee, barley, ground nuts, desi tururad and rice till January ; castor gurjeeramaize, masoor gram, mustard seed, pepper, oil cake and soya oil till January ; sugar till January ; and finally, chilli, castor seed, coriander, dhania and wheat till now. What do the data tell us? Against this background, we carried out a study on the impact of agricultural commodity futures markets.
Over the period January Decemberwe observed a consistent rise in spot prices for uradpotato, onion and soya, and moderate increases in prices of rice and wheat. It may be recalled here that future markets prevailed in rice till Januarywheat nowurad till Januarypotato till now and soya till January Thus the weight of 87 agricultural goods in the WPI is Of these, 21 goods which control 70 per cent of future trading had a weight as low as When we compare the price movements for potatoes and pulses, which are major staples for the poor, with the all-commodities WPI, we find that prices of the two commodities rose much more steeply than the WPI.
Given that essential food items experienced a steeper price rise in this period than the WPI, and that some of these food items have also been open to futures trading, we have done Granger tests 13 on the causality between spot and future prices of chanasoya, potato and wheat for which data was available.
From these tests we can check if the causality in terms of rising prices was from future to spot prices or vice versa. For all of these, the Granger test indeed shows a causality, with changes in futures prices le ading those in spot prices. Accordingly the uptrend in the latter can be interpreted as a fall-out of trading of these commodities in the futures markets.
In this case the spot price rise was obviously the answer to the lead by future prices, which are subject to speculation. Thus the uptrend in futures prices generates an upward spurt in spot prices too. One how to trade in commodity market in india aspect of the impact of futures trading is considered to be the volatility it imparts, both in the spot market and in the futures. Of course the impact, if any, implies a causal link between the two set of prices. Comparing the monthly variations in spot prices, we found a distinct rise in volatility for five out of the six sensitive items rice, wheat, how to trade in commodity market in india, onion, urad and soya during the period January Decemberwhich also happens to be the period when futures market in these and other commodities were operating.
This provides an indirect evidence that the opening of futures trade was responsible for wider fluctuations in spot prices of these commodities. On the whole it can be observed that while futures trading in commodities has led the path for further rise in spot prices, how to trade in commodity market in india latter also has been subject to an wider range of volatility with the successive opening of futures markets.
Impact of trading in financial markets on commodity futures UNCTAD had pointed to the links between commodity futures and financial asset futures in the international stock markets. Taking this cue, we can investigate the implications of futures markets on commodity prices in India. This also tallies with the argument that, with liberalisation of markets, commodity prices in India have been pushed up as a result of the rise in international prices.
We compared the spurts in the monthly total turnover in stock markets between the National and Bombay Stock Exchanges how to trade in commodity market in india those for spot and future prices of specific commodities like wheat, rice, potato, urad and soyabean. We tried to find the relation, if any, between movements in the total stock exchange TSE turnover and individual spot price indices. How to trade in commodity market in india tests of a regression analysis indicated a strong negative relation between the two for uradwheat and rice, if we consider the period between May to May how to trade in commodity market in india It may be mentioned here that this also covers the period when global stock markets collapsed, affecting the Indian market as well.
Redoing the exercise over a longer period from May to Maywhen the stock market was at its boom till the crash began in midwe found a positive link between the TSE and individual spot prices of the same five commodities, with TSE regressed on the latter. Thus speculation and portfolio adjustments i.
Thereafter the crash in financial asset prices and in the turnover of these assets led the same agents to look for alternative sources of returns on their funds. They turned to investments in commodity futures which, as we observed, also affect the spot prices. The negative relation between the monthly prices of commodities and the monthly values of TSEs over May to Mayreflect the above tendency.
Stock markets in India, subject to an uptrend as well as volatility, experienced the contagion effects how to trade in commodity market in india the recent global financial crisis, as can be witnessed from the dip in stock indices since January We also notice parallel downslides across countries in commodity futures markets, both for the multi-commodity futures exchange in India and for the international commodity futures exchanges.
The phenomenon seems to have pervaded the Indian commodity how to trade in commodity market in india as well, both by pushing up prices and by linking the commodity market to the market for financial stocks, via the portfolio decision of those who speculate on both. No benefits are visible for farmers in the form of their securing higher prices in the market for their produce.
Instead futures markets in commodities in India seem to have provided new avenues of speculation to traders in equity markets, as has happened elsewhere. We observe steep increases in spot prices for major food items along with a statistical correlation indicating that a rise in futures prices led to a rise in spot prices. Statistical tests also indicate the links between investments in the stock market and those in the commodity market.
A boom in stock prices was matched by parallel increases in commodity prices, possibly with futures prices pushing up the spot prices and also with stock piling financed by financiers in either market. However, the slump which came by the fall of in the stock market initiated a portfolio adjustment in which investors moved funds to the commodity market. Moreover, with the opening of cross-border trade, commodity prices have also been guided by the upward movements in prices in international markets.
For India, further opening of the future market in commodities, and especially in food items, needs to be dispensed with, in order not to let speculators have a wider playground to play with at the expense of the common people!
Economic Surveys, and However, as opposed to such arguments, it how to trade in commodity market in india be argued that with negative news about future, prices may go up irrespective of whether futures market is there or not. It may be mentioned here that both K.