Market regulator SEBI extended its ban on derivatives trading in seven agriculture commodities by another year late on Tuesday evening, leaving exchanges, participants, some industries and experts disappointed.

SEBI extended the ban on trading in non-basmati paddy, wheat, chana, mustard seeds and its derivatives, soyabean and its derivatives, crude palm oil and moong on concerns that lifting the curbs will lead to inflation. It issued a circular on Wednesday morning stating it has issued directions to the exchanges that offer commodity derivatives. SEBI imposed the ban from December 20, 2021, after prices of edible oils soared last year. Once the ban expired on Monday, the regulator promptly extended it.

SEBI has been under pressure to lift the ban. Last week, the Commodity Participants Association of India (CPAI) wrote to the regulator urging to lift the ban as it was leaving small and medium businesses without any cover to hedge their risks.

Narinder Wadhwa, CPAI National President, said the move deprives value chain participants and farmer producers organisations of a tool to manage their price risks, a facility that large companies avail of by trading on exchanges abroad.

2006-07 signals

“Even 20 years after commodity trading was permitted in the country, it is regrettable that bans on derivatives are imposed. In 2006-07, it was NCDEX wheat futures that signalled signs of trouble on the crop front,” said a trader, without wishing to be identified.

The Solvent Extractors Association said in a statement that its members were bitter over the development and urged the Centre to permit derivatives trading in globally traded palm oil and soya oil.

Naveen Mathur, Director (Commodities & Currencies), Anand Rathi, said the extension of the ban will dampen sentiments, particularly when investors were expecting its relaunch as the Centre and RBI’s measures had brought inflation closer to the comfort zone.

Reintroduction of trading in these commodities would have helped exchanges regain investors’ confidence and recoup lost volumes besides opening up an opportunity for corporates to hedge their risk in these volatile times, he said.

Concerns over speculation

A trading expert pointed to Finance Minister Nirmala Sitharaman’s statement in Parliament that the Centre was keeping an eye on inflation and said it was still concerned over high prices for rice and wheat. “It is a good move since many participants were speculating. Look at what happened in cotton derivatives,” the expert, speaking on condition of anonymity, said.

According to Consumer Affairs Ministry data, wheat and rice prices have increased 15.5 per cent and 7.5 per cent, respectively, over the past year. Barring palm oil and mustard oil, prices of other edible oils such as sunflower and groundnut are higher than in the year-ago period. Consumer price inflation dropped to 5.9 per cent in November but the RBI said it is “down but not out”.

So far, the ban has particularly hit trading volumes on the agri-focused NCDEX. The banned commodities accounted for 60-70 per cent of the exchange’s volumes. NCDEX trading volumes halved to ₹10,053 crore in October against ₹26,468 crore in January. However, it revived to ₹20,957 crore in November on higher volumes in guarseed as prices jumped sharply on crop damage amid strong demand.

Kapil Dev, Chief Business Officer, NCDEX, said the exchange will approach SEBI and policymakers again to understand the gaps that need to be addressed to increase their confidence to permit derivatives in these commodities.

“Earlier documents and studies have concluded that prices are a function of demand-supply and agriculture derivatives trading do not result in a price increase or inflation,” he said.

Another trader said such a ban will prevent farmers and farmer producer organisations from taking part in instruments such as options in commodities. “The Centre should facilitate people on the growers side to gain from derivatives market,” he said.

 “We hope derivatives trading will be allowed even before December 2023 if inflation drops meanwhile,” CPAI’s Wadhwa said.

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