Retrograde move

The Securities and Exchange Board of India’s (SEBI) order suspending trading in seven agri commodity derivatives is an ill-advised move that will impede the growth of this segment. The curb on trading in futures and options of paddy, wheat, chana, mustard seeds, soya bean, crude palm oil and moong was at the behest of the Department of Economic Affairs and seems to have been aimed at arresting the price inflation in these commodities. But in doing so, the market regulator is taking away an effective tool to shield users from price volatility and inflation. Agri futures and options play a critical role in helping farmers sell the agricultural produce and in hedging against adverse price movement. In the absence of a unified spot market for farm produce, exchange traded contracts can play a useful role in discovering price in a transparent manner. But by imposing such sudden ban on trading, the Centre is repeating the mistake it has made many times in the past. The trading suspensions enforced in the past have increased the regulatory risk in this segment, deterring large institutional investors from participating in these contracts.

As a result, turnover in agri-derivatives has been constantly sliding with the share of agri commodities declining to just 4.7 per cent of overall commodity derivatives turnover in 2020-21. Further, the trading is concentrated in a handful of agri commodities, with the top 10 most-traded contracts accounting for around 94 per cent of the volume. With the commodities banned by SEBI being among the most traded, volumes and liquidity on exchanges are bound to drop sharply. There is also an urgent need to improve participation in agri-commodity exchanges. Turnover data shows that there are no farmers or farmer producer organisations trading on either of the two large commodity exchanges — NCDEX and MCX. Institutions are also absent with broker-led proprietary trading and retail traders accounting for bulk of trading. Companies wishing to hedge their commodity exposures account for less than 7 per cent of turnover. While there were reports that foreign portfolio investors could be allowed to trade in this segment soon, it is doubtful if they would want to trade in such an illiquid market that also involves high degree of uncertainty.

If the Centre and SEBI are serious about creating a vibrant derivative market for agricultural commodities, then the suspension should be withdrawn at the earliest along with an explicit promise from the Centre that they will not be reimposed. If the Centre is worried about speculation, prices can be curbed through other means such as imposing tighter daily limits on sensitive commodities or by increasing trading margins very steeply. The regulator should also speed up efforts to increase trading volumes and participation on exchanges through creation of higher awareness among the users and farming community. A liquid market has in-built checks that prevents excessive speculation. Trading suspensions are anathema to free markets and should be avoided at all costs.

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