RBI Said Future Trading May Not Be Linked To Spot Price Hike (24-Aug-2010)
There has been a tendency in the Indian policy arena often to blame future trading in commodities for rise in spot prices. The increases in food and essential commodity prices in 2009-10 has further brought to the fore the debate on the role of commodity futures market in influencing spot price trends, even as the share of agricultural commodities in overall futures trading declines reflecting imposition of bans on trading of several commodities.
However, the Reserve Bank of India (RBI) in its latest annual report has observed that there is no evidence to conclusively suggest that future trading impacts the spot prices. The RBI stated in its annual report that while speculation in commodity futures was seen in some quarters as a factor behind the high food inflation during 2009-10, crucial questions like whether the activities in commodity futures market reflect genuine needs of hedging or speculation, and whether such activities systematically influence the commodity prices and lead to increased price volatility, largely remain unsettled in academic and policy discussions.
In an argument that speaks against the practice of banning commodity future trading whenever the price of a commodity shows an uptic, the central bank said that several commodities which were not traded in the commodities exchange, such as fruits and milk, also exhibited price increases during the last one year. Moreover, it added that, certain commodities that were banned for trading in 2007, such as rice, wheat, tur and urad, also exhibited price increases subsequently.
Another evidence of futility of banning future trading could be the fact that even after the ban was imposed on trading of sugar in 2009, its prices continued to increase following a tight supply outlook and a similar trend in international prices. On the other hand, prices of certain essential commodities that are being traded in the futures market, such as gram, chillies, rapeseed oil and coconut oil, either remained moderate or declined during 2009-10, despite overall food inflation being higher.
“The empirical analysis, thus, does not provide any conclusive evidence in support of the relationship between spot and future prices. Commodity prices in India seem to be influenced more by other drivers of price changes, particularly demand-supply gap in specific commodities, the degree of dependence on imports and international price movements in these commodities,†concluded the RBI.
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