SEBI suspends trading of agri commodity derivatives for 1 more year

With inflation still high, the Securities and Exchange Board of India (SEBI) in a late night order passed yesterday extended the suspension on derivatives trading of paddy (non-basmati), wheat, chana, mustard seeds and its derivatives, soybean and its derivatives, crude palm oil and moong for a period of one more year till December 20, 2023.

Last year, the regulator had barred exchanges from launching any new contract on the 7 commodities and with respect to their running contracts it disallowed any new position and permitted only squaring off.

Although retail inflation, as measured by the consumer price index (CPI), came in at 5.9 per cent for November, the lowest in 11 months, it was still just marginally below the tolerance band.

Data showed that before the ban last year, the aforementioned commodities contributed nearly 54 per cent of the total deposits in NCDEX between April 2021 and July 2021 with chana being the highest with 40 per cent of the total deposits.

In terms of delivery also, the suspended commodities contributed around 55 per cent of the total deliveries from the exchange platform with chana being the highest at 29 per cent.

Because of the suspension, the quarterly average daily volume of NCDEX has fallen from Rs 2,310 crore in FY22 to Rs 960 crore in FY23, a fall of nearly 58 per cent, the exchange said in a report published a few months back.

No impact

A recent study of two commodities on which futures trading has been suspended on behalf of NCDEX Investor Protection Fund found that there was no evidence that derivatives trading led to higher prices or suspension of their futures had any impact in bringing down the price volatility.

The study was done on mustard and chana by Prof Nidhi Agarwal from IIM-Udaipur, Tirtha Chatterjee of Jindal School of Government and Public Policy and Karan Sehgal, a research scholar.

It found that price movement in commodities with no futures is uncontrolled and likely to be more volatile than commodities that have a footprint in the derivatives segment as they are bound by position limits, margin requirements and daily price limits.

“The analysis showed that mustard oil prices would have had a similar trend even without suspension,” the study showed.

Rather, the study found that before suspension of the futures market, it had a dominant share of 64 per cent in uncovering the true price of mustard seed. “This role ceased because of the ban,” it added.

There was a similar finding for chana.

Both mustard oil and chana were suspended from futures trade on August 16 and October 2021 which was later extended for one year starting December 20, 2021.

Since the commencement of derivatives trading in agricultural commodities, futures have been banned multiple times on one pretext or the other, the most common being impact of inflation.

Although many committees and panels constituted in the past have found no linkages between price rise and futures markets, successive governments have always found commodity futures as being the easiest scapegoat to blame for the rise in inflation.

Banned at the drop of a hat

In fact, data shows that in the last more than 15 years, commodities futures in different items have been suspended multiple times some of which have not been revoked till date.

In some commodities like common rice, tur and urad, futures have never been revoked ever since they were banned in 2007.

Every year since then, barring one or two in between, data shows that futures contracts for either one or more commodities gets suspended for periods ranging from one year to a few months.

Past panels

Ironically, futures trading in commodities has been suspended at the drop of a hat despite numerous past committees and panels finding no direct linkage between such trading and price rise.

In 2008, a high powered panel constituted under the chairmanship of the Planning Commission member Abhijit Sen did not find any clear evidence of either increased or reduced volatility of spot prices due to futures trading.

Thereafter, a Parliamentary Standing Committee on Food, Consumer Affairs and Public Distribution (2011) said that futures trading does not impact prices of agricultural commodities. It said ideally there should be a convergence between spot and futures markets under a uniform regulatory framework for the optimization benefits of these reforms.

An RBI study of futures markets (2009-10) since the start of such trading in India concluded that commodity prices in India are influenced more by other drivers such as demand-supply gap, degree of dependence on imports and international price movements.

There have been other reports and studies that have found little evidence of futures trading pushing up or driving down commodity prices.

With regards to complaints about low participation of farmers in these exchanges.

Reports show that of late, several farmers have become part of the futures derivatives markets through the Farmer-Producer Organizations (FPOs).

In NCDEX alone, since 2016, reports show that around 440 FPOs representing around one million farmers have been on-boarded.

Out of which 155 FPOs representing over 430,000 farmers have successfully used the exchange platform to hedge the price risk for over one lakh tonne (valued at close to Rs 488 crore) in 18 commodities till July 2022.