The Hindu Business Line : For an efficient futures market

The global stock market meltdown following the unwinding of positions in yen carry trade and monetary tightening in China has once again brought to the fore the risk that can arise from the unfettered flow of too much money — especially cheap money — into various asset classes. Often, savvy managers of hedge funds and other speculative funds extract high returns from the market through deft and timely handling of transactions, and manage to square up positions before it is too late. Not so the ordinary retail investor, who bears the brunt of the collapsing market. If the organised and reasonably transparent equity market is so vulnerable to changes in the global economy, one can imagine the dangers lurking in an underdeveloped commodity market such as India's. In an economy of shortages, the flow of huge speculative funds without strict safeguards can compromise the interests of both producers and consumers. Quite apart from physical deficit driving up prices, the leverage that margin trading in the commodity bourses offers could have caused the recent extraordinary spike in the prices of some essential food products.

In the Budget, the Finance Minister announced the Government's intention to appoint an expert group to study forward trading in commodities. The group must examine the desirability and appropriateness of commodity futures trading for the country, keeping in mind the growth potential and emerging socio-economic conditions. Futures trading and restrictions on the physical market cannot co-exist. It must recommend how best to deliver real benefits to producers and consumers. Strengthening the physical market, improving flow of information, distinguishing hedging and speculative transactions, and treating hedgers and speculators differentially are some aspects that deserve attention. There can be no compromise on ensuring appropriate skill-sets as well as autonomy for the regulators.

Without doubt, futures trading has a sound theoretical basis. Price discovery and price risk management are essential in an environment of liberalised trading and globalising markets. Because a healthy futures market is an extension of a distortion-free physical market, it is of utmost importance to address the issues of the cash market, including production, quality and marketing. Setting up sophisticated exchange platforms without strengthening the `real economy' — agricultural production — in recent years is the root cause of the problem. Genuine stakeholders (primary producers and processors) have been wary of this market. The performance of the Agriculture Minister will be judged not so much by what he did to protect or promote commodity futures, but by his contribution to raising production and productivity of major agricultural crops and for his serious attempts to solve the ongoing agrarian crisis.

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