A Reserve Bank of India (RBI) working paper says regulation of commodity futures markets has to evolve concomitant to the changing dynamics of commodity markets. And, that only an emphasis on over-the-counter market reforms, mainly covering swap dealers, might be insufficient. The paper, titled ‘Global liquidity, financialisation and commodity price inflation’, is authored by Kumar Rishabh and Somnath Sharma.
It says financialisation of commodity markets and some fundamental factors have driven commodity price inflation. Financialisation means a long-term shift in an economy from production to finance.
The paper investigates the role of such financialisation (captured by speculative trading), global liquidity (private and official) and fundamental factors (emerging market demand) behind global commodity price inflation.
According to the paper 'private liquidity’ is inflationary and ‘official liquidity’ is not, possibly due to central banks leaning against the wind since the financial crisis of 2008. Besides, says the paper, active commodity derivative traders such as money managers, along with traditional passive swap dealers, have an important role in commodity inflation dynamics.
It says global private liquidity has to be watched more closely, as do global monetary aggregates, for build-up of inflationary tendencies in commodity markets. Supply-side responses, mostly long-term in nature, are required.