ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Is Suspending Agricultural Futures Justified?

Empirical Findings and Implications

The government’s decision effectuated in December 2021 to suspend agricultural futures trading is analysed. The analysis utilised daily futures and spot price data of three suspended agricultural commodities of pre-ban sample periods to suggest that chickpeas, soybean, and refined soy oil futures exhibited high speculative activity and enhanced liquidity. Spot price volatility has considerably increased for chickpeas and refined soy oil post-ban period. The intermittent and prolonged suspension of chana and soybean derivatives can adversely affect price formation and transmission.

An abridged version of this paper will appear in the Commodity Insights Year Book 2023, brought out by the Multi Commodity Exchange of India and the National Institute of Securities Market. A preliminary version of this paper was presented at the Annual International Research Conference, 15–17 December 2023 at Indian Institute of Management (IIM) Lucknow. The authors are thankful to an anonymous reviewer of this journal for insightful comments that helped them revise the earlier draft significantly.

The Government of India suspended more than half a dozen active agricultural futures contracts in December 2021. The decision disallowed the national-level commodity exchanges1 from launching any new contract of the suspended futures from the announcement date until December 2024. Although the Commodity Derivatives Advisory Committee (CDAC) suggested relaunching futures trading for suspended commodities whose spot prices are below the minimum support prices (MSPs) in October 2022, the suspension has neither been withdrawn nor has the committee presented any incisive analysis of pre- and post-ban price movement of suspended futures. In other words, a reality check is necessary to justify the ban and its extension. To this end, Hussain and Saini (2022) present a chronology of the suspension of agricultural futures trading and their revocation periods (Appendix, p 64), suggesting that agricultural futures trading suspension has been a recurrent phenomenon in Indias commodity market landscape since 2005.

A general opinion for suspending agricultural futures contracts is increased spot price volatility and food price inflation. No conclusive evidence has yet impugned the commodity futures role in food price inflation (Sen et al 2008). Empirical studies by Nath and Lingareddy (2008), Sahoo and Kumar (2009), and Ahmad and Sehgal (2015) explore the commodities spot and futures interrelationship and volatility spillover. Sobti (2020) examined the destabilisation hypothesis in the context of futures trading suspension on spot price volatility for wheat, sugar, and rubber. The study found that spot price volatility appears to be higher during the ban period than the pre-ban and post-relaunch periods for selected commodities, excluding chana or chickpeas. Aggarwal et al (2022) reported that the futures market dominates price information sharing, which led to the price discovery of oilseeds and suggested that the suspension on rapeseedmustard seed futures trading needs to be re-examined.

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Published On : 9th Mar, 2024

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