The suspension of trading in commodity derivatives in India, which SEBI had instituted in 2021, brought about vast changes within the agricultural ecosystem. Implemented on seven agricultural commodities—individually, mustard seeds, soybeans, chana, and wheat—this trade stoppage was aimed at controlling high food price inflation arising from speculative activities. However, the evidence of studies by BIMTECH, Noida, and SJMSOM, IIT Bombay implies that the suspension has crippled key mechanism(s) of some of the markets and, hence, has worsened price volatility and risk for market participants.
The study conducted by BIMTECH covered the span of January 2016 to April 2024 for the above commodities: mustard seed, soybean, soy oil, mustard oil, and palm oil. It found that the suspension of ETCDs has resulted in losses of critical price reference points for mandis, and its loss results in scattered and unpredictable price variations. Without these consistent benchmark prices, the related uncertainty and volatility increased in both wholesale and retail markets for the traders, farmers, and other chain agri-supply chain stakeholders. This analysis showed, in the case of edible oils, that prices continued to go up even after suspension placed a burden on retail consumers and distorted the market trend. That means the inflationary effect of derivatives trading might be exaggerated.
A mixed research study by IIT Bombay in their research further informs these results. Surveying the degree of physical market participant involvement among farmers and Farmer Producer Organizations across Maharashtra, Rajasthan, and Madhya Pradesh, the study explores how the suspension has affected price discovery and risk management. Key statistics, such as key findings, indicate that a derivative contract remains an indispensable tool in a larger pursuit of price stability and risk mitigation—the very support for hedging against inevitable price volatility and uncertainties. Such a scenario cast a negative spell on the confidence of the market and weakened participants’ capacity to earn fair prices while reducing their risks as well.
The most important findings of the two studies relate to the highly publicized effects of futures trading on food inflation, and on balance, both of them failed to show any robust proof of futures trading contributing to food inflation. A thorough statistical analysis of price correlations of five suspended commodities indicated more influences on the changes in the prices from global trend indicators, weather events, and supply chain constraints. In addition, retail prices’ dynamics are well driven by domestic and international demand and supply impacts even during the suspension. This again suggests that regulatory intervention directed towards the targeting of trading derivatives may not be effective in controlling price inflation.
Indeed, these effects on the agricultural ecosystem have been profound. The suspension has eroded trust in market mechanisms, reduced participation in derivatives trading, and weakened price risk management practices throughout the value chain. Commodity derivatives have long been seen as stabilizing tools for volatile markets, offering market-driven price signals and protection against unexpected price shocks. The removal of these instruments reduces the ability of the market to understand and smooth price shocks, with the positive and negative effects cascading down to all value chain actors, from farmers to final consumers.
The studies point out that commodity derivatives trading should be viewed as an integral component of a healthy economy, whose benefit lies in assistance in price discovery and risk reductions through wider participation. Both institutions advocate for more reasonable regulation in which global market trends are recognized as well as fundamental supply-demand dynamics rather than suspending wholesale trading activity en bloc. To be effectively regulated, the market should be made more transparent with participants’ confidence coupled with adequate mechanisms for hedging to protect vulnerable stakeholders such as those in the agriculture sector.
Experts feel that the policymaking relating to the role of commodity derivatives in price formation and risk management should revisit the process and encourage active participation by farmers and other stakeholders for long-term stability. Commodity market structures need strengthening, and the global best practices have to be followed for India’s commodity market so they can realize better prices in production and contribute less to the price volatility exposure of consumers.
Source: Newsvoir