Commodity derivative markets in India: Issues and concerns

Derivatives as a risk management tool have existed in India for more than a century. But the testing times have come now when the global economies are removing trade barriers gradually to facilitate trade so that massive increase in demand can be handled and the uncertainties in supply is managed in an organized manner. India now enjoys world ranking with respect to trading volume in certain commodities like Silver, Gold, Copper, Guar Seed etc. Nevertheless, the functioning has been distorted due to lack of understanding of the dynamic nature of the markets. With this enhanced role there is a need to deliberate on the issues of further research in the area so as to promote the growth and development of the market.

This study analyses the market behavior and price discovery in Indian Agriculture Commodity Markets. Commodity future trading was permitted in 2003. The commodity derivatives market in India has witnessed a phenomenal growth. The functioning of future market came under scrutiny during 2008–2009 due to price rise and the role of futures market in stabilizing spot prices was widely studied.

The study considered average monthly spot and future prices of nine agriculture commodities viz. cardamom, chana, crude palm oil, jute, mentha oil, potato, rubber, soybean oil and wheat trading on MCX and NCDEX during 20012-2013. Granger causality test have been used to test the price discovery i.e., the effect of future market on spot market and vice-versa. The market behavior was studied with the help of backwardation and contango.