Indian Commodity Derivative Market: An Appraisal of State Intervention

Commodity derivative trading in India had been in existence since the late nineteenth century when Cotton Trade Association, Bombay undertook organized derivative trading in cotton. Although over a period of time other commodities were inducted into the Indian commodity derivative market however its development was constrained by many hurdles. In the case of commodity derivative market the state traditionally played a very restrictive role and it was unanimously agreed that state intervention was one of the major cause of the unsteady growth of this market. Following the economic reforms initiated in 1991, the government lifted the ban on commodity derivative trading in 1993. However this respite was short-lived as rising prices prompted the government to impose a partial ban on the derivative trading of many essential commodities. The question regarding the impact of commodity derivative trading on price inflation is an unresolved one with many describing the phenomenon to be only a case of price discovery. The paper seeks to analyze the rationale of the restrictive policy of the state in the commodity derivative market and explore how such a policy actually affects market prices of affected commodities.