Empirical Investigation on Food Inflation and Efficiency Issues in Indian Agri-futures Market

Abstract

In early 2007, the Government of India (GoI) banned futures trading on some essential agro-commodities such as wheat, rice, and two varieties of lentils due to rising food inflation. However, futures trading in agri-commodities such as chana (chickpea), soy oil, rubber, and potato were temporarily suspended. Professor Abhijit Sen’s committee, constituted to study the relationship between futures trading and agricultural commodities inflation, did not find sufficient evidence of inflationary impact of futures trading in India due to too short period of commodity futures trading. Also, an efficient futures market is required for the producers, traders, and consumers to hedge their price risk. Thus, in this study, we analyze the market efficiency of agricultural futures market and the effect of futures trading on inflation with special reference to chana (chickpea) market in India. This study is for a time frame of 10 years from 2005–2014. The data on closing prices of chana in futures and spot markets and futures trading volume has been collected from National Commodity and Derivatives Exchange, and chana wholesale price index (WPI) monthly data from Office of the Economic Adviser, GoI. The collected data is analyzed for efficiency using Johansen cointegration approach and vector error correction (VEC) restrictions and inflationary effect using Toda Yamamoto (TY) version of Granger causality test. From the results, we find that the spot and futures prices for chana are cointegrated and unbiased, that is, the chana (chickpea) futures market is efficient. But, the futures trading of chana has inflationary impact, that is, futures trading volume of chana affects chana WPI. This research has got direct implications for government and market participants. India is the largest consumer of chana (chickpea)—the third most important pulse crop produced in the world. Thus, the inflationary impact of chana futures trading is a matter of concern for GoI.

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