Cotton trade body Cotton Association of India (CAI) has raised concerns about alleged speculative trades taking place on the Multi-Commodity Exchange (MCX) platform. Citing a sharply lower open interest (OI) in MCX Cotton Futures for the May 2022 contract, CAI has flagged serious distortions in cotton prices causing speculative movements and asked the Exchange to take measures to prevent it.

In a letter to MCX, the CAI stated that it had noticed that the May month cotton futures OI came down to below 3,500 lots as on May 13, which is equivalent to 87,500 cotton bales (each of 170 kg).

“Considering the fact that the Indian crop size this year is about 325 lakh bales, the MCX open interest for May 2022 are hardly a quarter percentage of entire Indian crop size,” CAI said in the letter dated May 13, 2022, and marked to officials in the Union Textiles Ministry and Ministry of Finance besides other cotton trade organisations.

Such a low OI and the existing higher exposure limit of up to 90,000 bales available to each participant at MCX, the CAI alleged, were leading to daily speculation at MCX and galloping of cotton prices.

Why low OI is a problem

In Futures trade, OI is a key matric to assess the active participants -- buyer and seller -- on the platform for the particular commodity. It is the total number of outstanding contracts that are held by market participants at the end of the day, indicating buying or selling positions that are open

As per the market participants, the cotton crop in the US is estimated at about 175 lakh bales, while the US ICE Futures has about 100% OI, indicating mostly genuine buyers or sellers. But on MCX, the OI has been sharply lower, due to which the cotton stakeholders believe that the speculators pull up cotton prices every day.

"Since the MCX prices are reference price for all ginners across India, this kind of speculation at MCX is very badly affecting the entire textile value chain," CAI noted in the letter. It also requested the authorities to take "immediate steps to avoid distortions in cotton prices."

Ginned cotton of 29 mm variety was quoted at ₹99,500 per candy (each of 356 kg) on May 13, 2022, which was ₹46,400 same day last year. On MCX, cotton futures for the May 31 contract was quoted at ₹48,700 per bale, which was ₹32,500 at the start of the year in January 2022.