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Rediff.com  » Business » Can ban on futures curb inflation?

Can ban on futures curb inflation?

By Commodity Online
Last updated on: February 23, 2007 12:27 IST
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Ban is no gain: that seems to be the mood in the commodities market even as fears of a total ban on 'futures trading' at the commodity exchanges gained credence among traders.

The government's hasty steps in what is described as measures to curb inflation have further fueled the traders' concern.

But leading economists have argued against intervention in the market and have flayed fears in certain section of the government that trading is the cause of inflationary rise.

According to Yoginder K Alagh, one of the experts in agri-economy, the government should go for capital account convertibility, curb overspending and lessen taxation burden.

"Once you liberalise the economy, there is no logic in intervening in it. One way to curb the inflation is to cut down money supply," Alagh told Commodity Online.

Milk, he cited, as one of the most important remover of poverty in India. Instead of supporting the milk producers to produce more, if the government puts a ban on its export, what will the producers do with the excess milk?

And to employ those unemployed from government measures such as this, money is spent on employment generation schemes.

Leading commodity traders like M R Shah says the government's ban on wheat exports shows double standards and poor foresight.

"On the one hand you dole out money to farmers committing suicide and on the other hand you create reasons for suicides. The government is pressing the panic button and has completely lost track of when to press it," Shah told Commodity Online.

Lower demand of wheat due to ban in exports means lower prices and the first and the only section that will be affected is farmers. Shah said such steps cannot have any impact on domestic prices. On the contrary, investments in commodities are considered a good hedge against inflation.

Traders say cheap politics and coalition limitations are killing the market as government is towing the line to curb market forces rather than seeing the reality of consumption outsmarting supplies. At a rate of 9.2 per cent growth it is natural that demand will increase.

Shah said if run well, futures trading would help millions of farmers hedge against price risks and setting up of spot exchanges will help them more.

"Imagine a market with a few producers and a few thousand buyers. Will it have any liquidity?" Though it is natural the speculators also benefit from the markets, they cannot be blamed for inflation. If that were the case prices of items like onions, potatoes and tomatoes, which are not even traded on the futures exchanges, would not have witnessed the surge.

The prices of onion continue to hover around Rs 18-19 a kg in Uttar Pradesh and other parts of the country from its previous levels of Rs 12-13 a kg a fortnight back.

The reason for the prices not going back to the Rs 12 a kg levels is lack of sufficient stocks with wholesalers as they ordered less onions for the season while anticipating a steep rise in prices of the vegetable in the February-March period which might have slowed demand for the vegetable in the retail market. Same is the case with tomato, which was selling at Rs 20 per kg, and potato (Rs 12/kg).

Figures with the Forward Market Commission, the commodity market regulator, show the trading volumes in the exchanges are increasing at a fast pace, almost doubling. The trading value has gone up to Rs 27.4 lakh crore ($619.8 billion) between April-December 2006, from Rs 14.08 lakh crore in the same year-ago period, according to FMC data.

Three national commodity exchanges - the National Commodity and Derivatives Exchange, the Multi Commodity Exchange, and the National Multi-Commodity Exchange - were set up in 2003.

Banning the futures trading, say economists, is like shooting the messenger. Prices in the futures market, they say, are indicators of the shape of things to come and help the government plan its economy well in advance.

Market, says Shah, consists of producers, traders, buyers, speculators, investors, hedgers and arbitragers and each of them has their own share of risk and benefit. If the government feels speculators fuel price rise, there is a regulator who can put a limit on the trading price.

According to P H Ravikumar, MD and CEO, NCDEX, the exchanges have technology and monitoring system against manipulators. But as in any trade market risks are always involved here too and if speculators are the people benefiting, they are the one who accounts the losses in cases of crashes.

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