Booming comexes and archaic policies

The commodity futures market has seen phenomenal growth in turnover in the current financial year in spite of restrictions placed by the government on futures trading in agricultural commodities to curb speculation.

The commodity exchanges recorded a turnover of Rs 36,04,047 crore between April 1, 2006, and March 24, 2007, registering a rise of nearly 70 per cent over the Rs 21,37,000 crore turnover in the whole of 2005-06.

The hurdles

During the last May and in November this year, two Parliamentary Committee reports recommended a ban on futures trade in agri-commodities such as wheat and pulses. The government, which was under pressure to control the rising inflation, banned futures trading in the agri-commodities recommended by the committee. It first banned futures in tur and urad in the last week of January and then a day before the Budget, it disallowed any fresh positions in existing wheat and rice contracts and denied permission for new contracts.

A demand to ban maize futures is pending with the government and the agriculture minister had to admit this in the Parliament. Earlier, there was a strong demand for a ban on guar seed and guar gum futures and the dust only settled down after the Forward Markets Commission (FMC) raised margins and reduced positions limits.

Last September, the FMC imposed several restrictions on agri-futures reducing the open interest position limits. This resulted in a decline in the turnover of the NCDEX, a new-generation commodities exchange that was termed as a leading agri-commodity futures exchange by the UNCTAD in 2005-06.

The government for the first time had to announce a formal review of the agri-futures. An expert committee has been set up and it is expected to take a call on minimising the impact of futures on prices and suggesting ways to reduce the impact.

The expert committee will give its recommendations, but the agri-futures are already under a cloud and opposition to them at this stage means something is wrong somewhere. The questions now being raised are was it a bad strategy to start agri-futures or were they not executed well.

Implications

With the Parliamentary Committee opposing the agri-futures, the FMC's measures to strengthen the futures market are in jeopardy. The delay in getting the Forward Contracts Regulation Act amended has created uncertainty and anxiety among the market players. The proposed amendments are intended to provide the FMC with wide-ranging powers and autonomy to regulate exchanges, members and the commodity futures market as a whole.

Many brokers are eagerly awaiting the entry of institutional players, including mutual funds and banks, in the futures market. They can provide liquidity to the market and liquidity can encourage hedging. Futures market sans hedging is only speculation.

Efficient spot markets

All the three national commodity bourses want to set up spot exchanges, but none of them has started any concrete work in this direction even after talking about it for a year. The reason for the delay is the state governments that are reluctant to amend their respective APMC Acts. Without an efficient spot market, the future price discovery is not perfect and spot markets, at present, are scattered across the country.

FDI Policy

The international experience in agri-futures is good and many of them are widely followed. The global markets are very liquid and a good amount of hedging takes place. Many such overseas exchanges want to enter India as a strategic partner, but a clear-cut FDI policy acts as a deterrent to their plans.