The Hindu Business Line : Future(s) imperfect?

Is the glamour of commodity futures trade waning? The marked slowdown in trading volumes on major commodity futures exchanges suggests that commodity derivatives may be going out of fashion for punters. The shakeout is healthy. After a spectacular take-off and exponential growth for three years, turnover at the mainline exchanges has either slowed or fallen the last several months. The worst hit are sensitive agricultural commodities such as pulses and wheat. The lure of easy profits generated so much speculative fervour in the last three years that the market perhaps over-stretched itself. Glib presentations by commodity exchanges and trade intermediaries, who projected this market as the panacea for all the ills of the commodity sector, attracted gullible investors to bet on commodities about which they had little knowledge.

The commodity futures regulator too did its bit. Instead of reining in unsustainable speculative fervour, the Forward Markets Commission overreached itself to assume the role of a market developer. Now, there are damning reports of a large number of gullible players heavily losing hard-earned money because they lacked product and market knowledge, and did not take ‘well-informed’ decisions about trading, having been hit by mass hysteria. A large number of established physical market traders who bought/sold and stocked goods have given up their traditional business. Many now simply sit in front of their trading screens to do ‘paper trading’. Worse, there are reports of market participants going bankrupt.

In a market where genuine hedgers are minuscule and speculators dominate, the very rationale for the market — price discovery and price risk management — loses relevance. There is neither genuine price discovery nor real price risk management. ‘Political risk’ is another factor that has come to the fore over the past several months. Despite warnings, most market participants refused to recognise the emerging threat of a policy change. For New Delhi, inflation concerns continue to reign supreme. The policy-makers would surely like to be seen as addressing the concerns of the poor, even if by cosmetically tinkering with policy. Clearly, the sequencing of commodity market reform in recent years has left much to be desired. The critical issues of the physical sector — the real economy — in terms of commodity production, logistics and marketing, remain unaddressed. The regulator must assume the responsibility to educate the market participants. A nation-wide campaign on do’s and don’ts of derivatives trading is the need of the hour. Hopefully, the expert committee to study the impact of commodity futures on inflation will take cognisance of ground realities and proffer appropriate advice to the policy-makers.

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