On May 7, the Forward Markets Commission suspended futures trading in four commodities: potatoes, refined soya oil, gram, and rubber, after the government expressed concern that speculation by traders and other middlemen was driving up spot prices, thereby exerting additional pressure on inflation. Finance Minister P Chidambaram, has also talked of extending the suspension to a blanket ban on futures trading of all agricultural and essential commodities, on top of the bans on wheat, rice, and lentils carried out in the last two years.

A future is simply a standardised contract to buy or sell a commodity of a certain quality for a specific price at a specific date in the future. To give an example, a farmer evaluates his stock of produce and is deciding whether to sell at the current (spot) price and get all his money upfront, or take heed of the trend of rising prices. In the latter case, he will sell his produce for delivery at a future date at a higher price. He gets an advance immediately, and collects the rest on the specified date. Futures traders match suppliers' offers with purchase bids from wholesale agents, retailers etc. Ideally, this market platform provides ample information for both sides involved, keeps transportation and warehousing costs down, maximises profit for the farmer, and minimises risk and uncertainty, as one can essay the future price scenario and hedge against falling prices etc.

However, the common politically-driven perception is that there are other players in the field who seek to make a killing for themselves through speculation. Speculators thrive on risk, and their buying and short-selling actions will artificially push up the demand and therefore spot price. They may buy a large number of futures from farmers, and hold them for any period of time, before selling them to buyers at a significant profit. The Left Front worries that speculation throws an unnecessary spanner in the otherwise smooth process between farmers and buyers, and by driving up prices, affects millions of ordinary consumers.

While speculation does exist in futures trading, and is one factor behind the rise in spot prices of essential commodities, it is certainly not the only one, nor is it a major factor. Supply and demand mechanisms have been shown to be largely responsible for the rise in inflation.

In fact, Chidambaram has not outright proved or disproved the notion of speculation in futures trading as the culprit of inflation. The ban on futures trading in rice and lentils has not been shown to stem the steep prices in these spot prices. Speculation can be controlled through additional regulation and institutional instruments in futures markets, rather than banning trading altogether.