on the logic behind the move and the path forward. Excerpts: What is the basis for targeting futures trading in the four commodities?
Let me state at the outset that futures trading in the four commodities has not been banned. It has been suspended for four months. However, neither is there any indication that futures are behaving contrary to physical markets nor can it be ascertained that futures in these commodities are contributing to the price rise.
Rather we were hopeful that since the Abhijit Sen Committee too was not in favour of banning futures trading in any new commodities, the lapsed ordinance would be revived.
Why this decision then despite no clear evidence?
There is a public perception that futures trading has contributed to the price rise. The government wants to allay fears over anything to do with the price rise. Futures trading, by its very nature, gives an indication of future price movements. The government is obviously wary of giving such price signals to the public.
So the government asked you to ban trading...
When the matter was referred to us for a decision, we chose suspension rather than a ban. After four months, we can automatically renew futures trading and we will not have to go back to the government for permission to do so.
Meanwhile, the ban on futures trading of the other four commodities "" wheat, rice, urad and tur "" would also be reviewed after the four-month period.
How did you buttress your argument?
Consider this. Rubber plantation farmers, for instance, participate in the futures market to hedge their crop, which means futures trading is in their own interest. Then take the case of potatoes, whose prices fell, primarily due to a bumper crop (read oversupply).
As for the other commodities, there was no reason to ban their trading. In many commodities, our data show that hedging activity was high.
For instance, in black pepper, the hedging to open interest ratio was between 17 and 21 per cent, while in sugar it was between 33 and 47 per cent and in soybeen it ranged between 57 and 70 per cent and in soyoil it was between 25 and 51 per cent.
This hedging was from retail players since institutional players like banks and funds are not allowed to participate in the market. Hence, in my personal opinion, these measures as such will not help in containing prices.
But reports suggest that many participants, including hedgers, incurred huge losses. Your comments.
Whenever such harsh measures like suspension of trading are taken, some players will gain and others will lose depending upon their positions. This is the market risk.
How will markets react after suspension of some active contracts like soyoil and chana and the introduction of the commodity transaction tax (CTT)?
The proposal to impose CTT has already resulted in a huge fall in volume on the 20-odd comexes. The average daily volume before the move was Rs 20,000 crore and in April it came down in the range of Rs 12,000-15,000 crore. We don't support this tax and it should be completely withdrawn.
Commodity prices are determined by underlying physical demand and supply in the spot market. Thursday's prices are determined by Thursday's supply and demand. Prices of the commodity after one month depend on supply-demand situation of that point of time.
The futures market reflects the expectation of prices based on perception about supply and demand situation at that future point of time.
