Commodity Futures and Inflation Dynamics in India

Agricultural commodity futures are often perceived to exert inflationary pressures through speculative activities, which generally lead to temporary bans. This study examines the role of the futures market in facilitating efficient price discovery and transmission in the spot market and the overall performance in the backdrop of the suspension of derivatives trading in seven agricultural commodities in India since 2021-22. While the agriculture futures trade in NCDEX witnessed a steady deceleration even prior to the ban in 2021, the empirical findings suggest that there has been significant integration between futures and spot markets, facilitating better price convergence. However, post-COVID-19, we observe weakened relationships for some commodities. The information transmission from futures prices to CPI and WPI momentum is higher for the full sample period (201516 to 2021-22) than the pre-COVID period. The results highlight the need for assessment on a case-by-case basis with commodity specific regulatory measures instead of blanket restrictions on trade. Going forward, a gradual expansion of the agriculture futures market alongside long-run market reforms will be crucial to achieve a balance between mitigating speculation and ensuring market autonomy.