the story So Far: The Securities and Exchange Board of India (SEBI) on Monday issued instructions to stock exchanges in the commodity derivatives segment to immediately suspend trading in derivative contracts in key agricultural commodities, such as paddy (non-basmati), wheat, gram, mustard and its derivatives. Did it , soybean and its derivatives, crude palm oil and mung bean for a year.
As per SEBI statements made on August 16 and October 8 respectively, derivative contracts in these commodities were already suspended.
What are derivative contracts?
Derivative contracts are between two or more parties where the value of the derivative is based on an underlying asset, in this case agricultural commodities.
Derivatives prices are established by fluctuations in the price of the underlying asset. Derivatives can be traded on the exchange or over the counter (OTC).
How does the system work and what are derivatives trading?
Derivatives trading occurs when traders speculate on the future price of an asset through the purchase or sale of derivative contracts in order to maximize profits compared to buying the underlying asset outright.
Traders also use derivatives for hedging to hedge the risk against an existing position. With derivatives, traders can go short and profit from falling asset prices. They also use derivatives to hedge against any existing long positions. The ultimate aim is to get profit. It is seen as a deterrent to bring price discipline in the market.
What is meant by SEBI order?
No new contract will be initiated till further orders. In respect of ongoing contracts, no new position will be allowed to be taken. Only squaring up of positions is allowed. Imports in such commodities, especially edible oils, will come down in the short term as traders will not have a hedging platform. Hedging, which is speculative in nature, has been made difficult. This will continue to block the supply of local produce in the market, which should cool down prices. Import of goods for speculative gains will be discouraged.
What is the purpose of suspension?
This is to check rising prices of essential commodities, which are driving inflation. India is the world’s largest importer of vegetable oil and this measure will make it difficult for edible oil importers and traders to do business as they use Indian exchanges to hedge their exposure.
It is believed speculators have a role to play in pushing up prices and this needs to be discouraged to curb inflation and support growth as the economy recovers from the COVID-19 impact.
The suspension of trading in these commodities follows a communication from the Department of Economic Affairs, which is closely monitoring price movements.
How dangerous is inflation?
According to the RBI governor’s recent monetary policy statement, CPI inflation rose to 4.5% in October from 4.3% in September, after falling sharply between June and September. The continuation of high core inflation (ie, CPI inflation excluding food and fuel) since June 2020 has been an area of policy concern as input cost pressures may rapidly transfer to retail inflation if demand strengthens.
The governor’s assessment is that price pressures may persist in the immediate term. They observed that supply side interventions by the government limited the repercussions of continuing high international edible oil prices on domestic prices.
While cost-push pressures on core inflation continue, the inflation mark is likely to be slightly higher over the rest of the year as the base effect turns unfavourable. However, it is expected that headline inflation will peak in the fourth quarter of 2021-22 and moderate thereafter. RBI has projected CPI inflation at 5.3% for FY22.
What is being done to tackle inflation?
Apart from SEBI suspending futures trading in key agricultural commodities, the government and RBI are resorting to several interventions to check rising inflation.
Recently, as edible oil prices neared record highs, the central government substantially reduced taxes on imports of palm, soya and sunflower oils, but the move had limited impact on combating inflation. fell.
Central and state governments also recently reduced excise duty and VAT on petrol and diesel, with the aim of reducing inflation through indirect effects as well as direct impacts driven through fuel and transportation costs. .
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