Monday’s halt since launching commodity futures in 2003, targeting commodities such as soybeans, edible oils, wheat, rice and chickpeas, as officials took steps to calm rising inflation, one of India’s most dramatic moves Was.
But restrictions on access to futures contracts can increase volatility in domestic markets, by depriving traders of vital tools for decision-making, allowing them to cut stocks, delay long-term buying and selling, and even that may be forced to limit imports.
Govindbhai Patel, managing partner, edible oil trader GGN Research, said, “In the absence of futures, the market will not know about shortfalls and excesses. “It could create even more volatility in prices.”
The finance ministry did not immediately respond to a Reuters request for comment.
Patel’s firm, which used to buy edible oils for quick and far-flung delivery, and hedged on domestic exchanges, will now meet its needs only for 10 days at a time, he said.
“We used to hedge 70% to 80% of our volumes,” said Patel, a trader for nearly five decades. With hedging options not available, we are scaling down operations.
India is the world’s largest importer of vegetable oil to meet more than 70% of its needs, with monthly overseas purchases of around 1.3 million tonnes.
Sudhakar Desai, president of the Indian Vegetable Oil Producers Association, said futures contracts were important to ensure smooth flow of imports, allowing buyers and traders to hedge part of their shipments after signing deals.
“Everyone in the supply chain has to change the way they operate in the absence of hedging tools and a notional value,” he said.
Desai said that in the absence of national futures prices, price discovery could be more localised, with potentially weak in production areas and higher levels in strong consumption areas.
Manoj Dalmiya, Head of Brokerage Proficient, said organizations like alternative investment funds and international traders can turn to overseas markets to hedge their risks.
But this option is out of reach for smaller players, who require authorities’ approval to manage commodity and currency price risk, said the Mumbai-based broker of edible oils.
trouble for farmers
Regional processors who buy crops from farmers will also be in trouble, as they are deprived of advance sales through futures contracts.
Manoj Agarwal, managing director, Maharashtra Oil Extraction, said his firm can no longer hedge soya oil on commodity exchanges after buying soybeans from farmers.
“If we cannot hedge finished goods, we cannot afford to hold large quantities of raw materials,” he said. “We will operate at a limited capacity.”
In turn, a short list of stockists and processors could harm farmers, said Nitin Kalantri, a pulses processor based in Latur city in the western state of Maharashtra.
Kalantri said farmers flood the market with post-harvest produce, but usually find willing buyers among processors and warehouse users, eager to build up enough inventory for a year.
“If everyone withdraws operations due to uncertainty, farmers will struggle to find buyers and prices could fall.”
Soybean farmers also worry about not being able to use benchmark futures prices to sell the crop.
Ready access to futures prices nationwide forced traders to offer comparable prices to producers across the country. But there is no way to cross-check prices without futures, said farmer Sudhakar Kale, who harvested 2 tonnes of soybean in September, but held off the sale in anticipation of higher prices.
Other farmers like Ashish Naphade said futures prices also helped in deciding which crop to sow.
“Futures gave us an indication of possible prices at harvest time,” Naphade said.
Lending banks and financial institutions in lieu of warehouse receipts said futures helped them price shares so as to determine the size of the loan.
An official of one such state-run bank said, “We have to be extra careful while giving loans.
This story has been published without modification in text from a wire agency feed.
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