Opinion Freeing up futures

It is true that an amended FCRA will allow the regulator and commodities exchanges (two very active,and many waiting in the wings) to introduce options and open up trading opportunities for banks and financial institutions. It will bring depth and breadth to the market besides presenting better hedging strategies on both sides. While futures allow you to lock in prices today for purchases at a later date,options let you take advantage of price increases. Here,you can offer to sell at a given price. If prices move up,you can still choose to exit at a higher price by paying a small premium.

But more than anything else,once the bill is cleared by Parliament — which may take at least six months — it will create tremendous confidence in the commodities market,which has always fallen prey to political whims. For one,it will settle the debate that the regulation of commodity derivatives will be with the FMC and not the Securities and Exchange Board of India (Sebi) as suggested some years ago. And the amendments will arm the FMC with powers to actually regulate. Today,the FMC,of 1953 vintage,has less power than the much newer Sebi,the regulator for capital markets.

The bugbear of high prices or inflation,like anywhere else in the world,invariably directs political attention to commodity futures. There is,however,a difference between India and the rest of the world when it comes to this regulation. Developed countries let the market grow,allowed it to develop a robust price discovery and risk management system,and if it went overboard,introduced curbs. In India,we strangled it right at the beginning.

Futures prices always react to developments that would affect the demand-supply situation in a particular commodity in the coming days or months. Many imagine a strong correlation between the future and spot prices. Even the Abhijit Sen committee that closely studied this aspect could not establish such a link with certainty. The irony in India is that though the regulator always claims that the futures market is just a messenger,the government prevails upon it to issue orders suspending trading of products whenever prices shoot up in the spot market,making the FMC look like a puppet.

The futures market in agri-commodities has been especially fraught in India. The UPA has also picked on it whenever prices turn politically uncomfortable. In January 2007,the government or the FMC banned futures trading in tur and urad. It has been more than three years,but the ban is still in force. Wheat futures were banned in February 2007 and lifted after more than two years in May 2009. In 2008,forward trading in potato,soya oil,chana and rubber was suspended,to be re-listed after six months in November 2008. It is now said that since prices of sugar are depressed,futures in the commodity may be allowed again!

Globally,in most developed nations,turnover in the commodities market is three to four times that in the equities market. But,in India,it is skewed in favour of equities. The average daily turnover in the commodities market is about Rs 40,000 crore compared with Rs 120,000 crore to Rs 140,000 crore in the equity derivatives market. Though the commodities futures market is growing at over 50 per cent a year over the last two years,the lack of institutional players will eventually show.

It is not really in the country’s interest to put barriers to the growth of the commodities market. With such a big domestic market and with some 400 corporates having big global treasuries and multinational operations,the country cannot afford to be a price-taker. For instance,two years back,India had to pay a huge price when it tapped the Chicago Board of Trade to buy wheat despite being one of the top three producers and consumers of wheat in the world. We need to be there as price-setters. And this can happen only when the FMC is a strong regulator,institutional players are provided access to the market and products are not banned because of political reasons.

pv.iyer@expressindia.com