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Extension of futures ban on 4 items puts traders in a spot

Traders and industry experts are disappointed over the extension of the ban on soya oil, chana, rubber and potato futures. They believe this decision will affect operations, as there will be no platform to hedge price risk.

Terming the extension ‘unfortunate’, they reiterated that empirical evidence suggests there is no link between inflation in spot prices and futures trading. Instead, rubber shot up from Rs 120 to 141 a kg in the span of four months after the commodity was banned from futures trading.

The government prohibited futures trading in the four commodities from May 2008, for four months. Forward Markets Commission (FMC), the commodity regulator, has decided to extend the ban till November 30. Earlier, rice and wheat futures were restricted to check inflation that rose to double digits since June 2008.

Some brokers, on the other hand, had anticipated an extension of the ban, citing political compulsion. “The ban on the four futures has had little, if any, effect on their spot prices and the argument that futures trading does not affect spot prices is being well received. Nonetheless, the government could be looking to have surplus inventories and arrival of new crops for considering any removal of the ban,” said Kishore Narne, Research Head, Anand Rathi Commodities.

Participants from the physical market also expressed disappointment mentioning the adverse effect of the ban on hedging.

Rajesh Agrawal from Indore-based edible oils trade body Soyabean Oil Processors Association of India (SOPA) said the industry hoped for a lifting of the ban as futures market helped hedgers as a ‘backup’, in case they were unable to sell their entire stock in the physical market. “With the extension their operations will become tough,” he added.

According to KC Bhartiya, president, Pulses Importers Association, the government has only taken a view of inflation to extend the ban and importers are ‘very disappointed’ with the outcome. “When importers do not get hedging benefit, they (imports) could reduce and prices could rise further,” he said.

A 15% rise in rubber in the past four months was mainly a result of large brokers taking a hold on the pricing system. “Both planters and small traders took a hit,” said Bijosh Thomas, a rubber planter and trader from Kerala. The broking commission more than doubled in the period, fuelling the price rise.

Even exchanges are displeased with the low volumes that resulted from the ban. Daily trading activity on NCDEX has seen a drop of more than Rs 1,000 crore since May. According to Madan Sabnavis, chief economist, NCDEX: “Average daily volume of commodities like soy oil and chana have come down by Rs 400 crore each, which is clearly a loss for the exchange.”

Ahmedabad-based National Multi Commodity Exchange of India (NMCE) MD Kailash Gupta said rubber had contributed more than 35% of total exchange turnover. “Extension of the ban will hit everybody, hedgers, traders, tyre manufacturers.”

“This has clearly come as a disappointment. However, the exchange is obligated to follow directives of the regulatory body,” Unopom Kausik, chief business officer, NCDEX, said. Inflation for the week ended August 23 was at 12.34%, down 0.8% from the previous week. PM Manmohan Singh has recently reiterated that controlling inflation will be the top priority of his government.

Source: Economic Times

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