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No proof that commodity derivatives trade causes price spikes, finds study

Suspension of their futures does not bring down price volatility either, finds study conducted on behalf of NCDEX Investor Protection Fund

Commodity derivatives | price hike | futures market

Sanjeeb Mukherjee  |  New Delhi 

Mustard Oil
It found that in the case of mustard oil, futures market trading played no role in price changes. There was no empirical evidence of the impact of suspension of trade on price behaviour either.

A study conducted on behalf of of two commodities on which futures is banned found no evidence that derivatives led to higher prices or that suspension of their futures brought down price volatility.

The study, done on and by Prof Nidhi Agarwal from IIM-Udaipur, Tirtha Chatterjee of Jindal School of Government and and research scholar Karan Sehgal found price movement in commodities with no futures is uncontrolled and likely to be more volatile than commodities that have a footprint in the derivatives segment, as they are bound by position limits, margin requirements and daily price caps.

The study was released on Tuesday in the presence of Ashok Dalwai, CEO, National Rainfed Area Authority (NRAA) and Vijay Laxmi Nadendla, joint secretary in the ministry of agriculture.

It found that in the case of mustard oil, played no role in price changes. There was no empirical evidence of the impact of suspension of trade on price behaviour either.

“The analysis shows that would have had a similar trend even without suspension,” the study showed. Rather, the study found that before suspension of the futures market, it had a dominant share of 64 per cent in uncovering the true price of mustard seed.

“This role ceased because of the ban,” the study said. A similar finding was also for .

Both and were suspended from futures trade on August 16 and October 2021 which was later extended for one year starting from December 20, 2021.

Since the commencement of derivatives trading in agriculture commodities, the futures have been banned multiple times on one pretext or the other, the most common being impact on inflation.

"The derivatives market plays a very important role in price discovery, price dissemination and negotiating the risk. Today price volatility is the biggest risk faced by the farmers and policy reforms are needed to address the price risk faced by value chain participants. Currently the production centres and agriculture are highly fragmented and therefore there is a need for integration to bring effective price discovery and increase efficiency. This will further lead to our objective of one nation, one market," Dalwai said on the occasion.

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First Published: Tue, September 13 2022. 20:32 IST