World Bank For Better Integration Of Indian Cotton Markets

The World Bank has called for better integration of Indian cotton markets saying the 'inefficiencies' in trade and storage have been, to an extent, induced by government policies.

"The government policies prevent the national market from absorbing and cushioning regional developments in production," it said in a document on prospects for futures market in India.

If government restrictions on storage were removed, the existence of futures contract was likely to improve the integration of India's cotton market, the World Bank said.

This would help the cotton traders, who were active nation-wide, as they would be in a position to undertake low-risk arbitrage between prices of different varieties of cotton, it said.

 

At the national level, introduction of one contract, which would allow the delivery of main superior medium and long staple cottons throughout the country, should be considered, the document said, adding that if a national cotton futures market was successful, more regional markets could 'exist in its shadow'. The World Bank said non-transferable specific delivery (NTSD) contracts now allowed by the government were inefficient and risky tools for price risk management as they did not allow sufficient flexibility to users.

"The growth of India's cotton production, its potential for export and importance of textile sector point to a large potential demand for an effective mechanism of risk management," it said

However, the document said trade in NTSD contracts was likely to survive, though a futures exchange would provide for liquidity as NTSD was a cheaper way to fix forward prices.

Calling for policy reforms to alleviate trade-offs between liquidity and basis risks, it said the basis risks were high, reflecting policy impediments to better integration of physical markets. The risks mainly stemmed from the fact that about 80 varieties of cotton were grown, though no single type dominated the market.

Prices slump, hit by monsoon

Cotton prices on Thursday lost recent gains on increased selling by stockists and farmers amidst monsoon rains, dealers said. "Sluggish mill demand and tight money conditions also subdued market sentiment," one broker said. He said market-estimated unsold stocks of cotton at 700,000/800,000 bales in the Gujarat region and increased selling pressure from there also subdued prices for Punjab varieties. In spot deals, Gujarat Kalyan dipped Rs 400 at Rs 14,200/14,300 per candy while Kala-ginned slid by Rs 100 at Rs 12,200/12,300 per candy.