Govt against banning futures trade in essential commodities

Contrary to concerns from the market, the government is not in favour of banning futures trading in essential commodities.

Official sources said there was a consensus not to tinker with the futures market now since it would send wrong signals to the market and the financial system in general.

Secondly, barring wheat, sugar and some varieties of edible oil and pulses, there are not many commodities in which futures trading takes place. Thirdly, none of the commodities where futures trading is currently taking place does not contribute to the current rally of prices.

Forward Markets Commission (FMC) Chairman B C Khatua, in his meeting on the issue of inflation with ministers in New Delhi over the past two days, is learnt to have given a presentation, especially citing the example of sugar. “Since sugar futures have started, barring the first day, prices in both spot and futures market have come down. In wheat, there has been no major volatility to talk about. Therefore, banning futures do not seem to be a solution,” explained the sources.

While declining to comment on this issue, Khatua said there was no correlation between the price rally and the volume of futures trading. He added, “Not only this time, but earlier also, we have explained that even in commodities where the trading has been banned, the prices have continued to go up. Similarly, in some commodities, prices have come down drastically even when futures trading continues.”

“The solution seems to be developing market infrastructure, cold storage, warehousing facilities to store fruit and vegetables... Besides, setting up cold storages and warehouses seems to be good options,” explained Khatua.

He also said, “I am not greatly in favour of foreign direct investment (FDI) in food retail because states and individual entrepreneurs in the country do not lack cash. What we may need is agriculture technology development-linked FDI in retail.”

Khatua is of the view that the sector — food retail — may have 100 per cent FDI but foreign investors should have a lock-in period of 3-5 years to divest and scale back the limit to 75 or 49 per cent. In the process, the regulator must monitor the divestment in the favour of public and not individual retailers. Secondly, there was enough back-end infrastructure development in food retail before they divest, he added.