Impact of Futures Trading on Indian Agricultural Commodity Market

Abstract

Besides the well-established fact towards the requirement of market based instrument, there is always been a doubt, as expressed by different bodies, on the usefulness and suitability of futures contract in developing the underlying agricultural commodity market, especially in agricultural based economy like India. Therefore, an attempt has been made to re-validate the impact of futures trading on agricultural commodity market in India. The daily price information in spot and futures markets, for a period of 7 years (2004 -2010), for 9 major agricultural commodities, taken from different categories of Agri-products, are incorporated into various econometric models to test the concerned objective. Like most of the other studies undertaken on world and Indian commodity market, the present study have also exhibited that even though the inflationary pressure on commodity, especially agricultural commodity, prices have gone up sharply after the introduction of commodity futures contracts, the destabilizing effect of the futures contract is casual in nature and tends to vary over a long period of time. The empirical findings significantly shows that comparative advantage of futures market in disseminating information, leading to a significant price discovery and risk management, that can again help to successfully develop the underlying commodity market in India. Therefore instead of curbing the commodity futures market, it can always be suggested to strengthen the market structure to achieve the broader target.

Indian Agri-Commodities Markets: A Review of Transition Toward Futures

“…Organized trading in commodity futures in India was reported to have started in the latter part of the nineteenth century at Bombay Cotton Trade Association Ltd (established in 1875). Following cotton, derivatives trading started in oilseeds in Bombay (1900), raw jute and jute goods in Calcutta (1912), wheat in Hapur (1913), and in Bullion in Bombay (1920) (Mukherjee, 2011). However, many feared that derivatives fueled unnecessary speculation in essential commodities and were detrimental to the healthy functioning of the markets for the underlying commodities and, hence, to the farmers.…”

The Commodity Futures Volatility and Macroeconomic Fundamentals - The Case of Oil and Oilseed Commodities in India

“…The academic literature on the efficiency of derivatives to manage risk is also not in agreement as to the role of the derivatives market. There are studies which have pointed out the potential of the agricultural commodity derivatives market in performing the task of price discovery and price risk management (Naik and Jain, 2002;Karande, 2006;Lokare, 2007;Elumalai et al, 2009;Mukherjee, 2011). Ranjan (2005) found that futures trading did reduce seasonal price volatility in the case of Soya Oil.…”

Volatility Spillover Effects between Futures and Spot Markets – Case of Agricultural Commodity Derivatves in India

“…Shihabudheen and Padhi (2010) concluded that, volatility spillover from futures market to spot market was stronger in case of majority of the selected agricultural commodities. Mukherjee (2011) concluded that, the volatility spillover from futures to spot market was stronger in case of wheat, chilli and soya oil. Malhotra and Sharma (2016) found out that, spillover effect from spot to futures was more than the spillover from futures to spot, in case of majority of the commodities except mustard seed.…”