Commodities Futures And Inflation

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ABSTRACT Indian markets recently thrown open a new avenue for retail investors and traders to participate: commodity derivatives. For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities are the best option. They provide risk management facility. However, India, under pressure to cool inflation running near two-year highs, banned new wheat and rice futures contracts in its fledgling exchanges in February in a bid to check speculation and hopefully tame prices. This report presents a study to find out whether futures trading leads to increase in price of essential commodities like wheat and rice. It also analyses the various factors that are leading to the increase in price of these essential commodities. Some recommendations are given to control the increase in price these essential commodities. INTRODUCTION Commodities Futures trading is a class of Derivatives trading, in which futures contracts derive their value from the ruling price of underlying commodities. This is a mechanism by which participants can enter into transactions for purchase and sale of commodities at a price, where the performance of delivery and payment obligation becomes due on a future date. Futures trading in commodities in India are governed by the provisions of the Forward Contracts (Regulation) Act, 1952. As per provisions of this Act, futures trading in commodities can be conducted only by such Commodity Exchanges, which have got recognition from the Forward Markets Commission (FMC) under Section 6 of the Forward Contracts (Regulation) Act and have got specific permission from FMC to launch futures trading in specified commodities. HISTORY Organized commodity derivatives in India commenced nineteenth century when the Bombay Cotton Trade Association started futures trading in 1875, barely about a decade after the commodity derivatives started in Chicago. As time progressed, derivatives market developed in several other commodities in India. 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). After the Independence, The Forward Contracts (Regulation) Act was enacted in 1952 and the Forward Markets Commission (FMC) was established in 1953 under the Ministry of Consumer Affairs. FMC acts as a regulatory body, which regulates the commodity markets in India. The mid 1960s witnessed an unprecedented rise in the prices of major oils and oilseeds as a result of sharp fall in the output. Futures trade was banned in most commodities to contain speculation, which the government attributed to rising inflation.

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