Govt extends ban on derivatives trading in 7 agri commodities by one year

The Government has extended the ban on derivatives trading in seven agriculture commodities by one year till December 2025 on the expectation that trading in these commodities could stoke inflation further. The ban has been extended for the third time, after it was first imposed in 2021.

The commodities that will be suspended for trading on the online derivatives exchange platform include paddy (non-basmati), wheat, chana, mustard seed and its derivatives, soyabean and its derivatives, crude palm oil and moong.

On December 19, 2021, market regulator SEBI had directed stock exchanges with commodity derivatives segment to suspend trading in derivatives contract in seven agriculture commodities.

The suspension of trading in these contracts was extended twice for one year till December 2024. In continuation of the said directions, the suspension of trading in these contracts is being extended till December, 2025, said SEBI in a circular.

The extension of ban on the most liquid contracts had impacted the agriculture commodity focused NCDEX. The exchange has built the whole eco-system for agriculture derivatives, including third-party warehousing, assaying and smooth delivery of commodities on expiry of contracts. This apart, it has developed a vibrant farmers’ producer organisation to facilitate farmers’ participation on the exchange platform.

Recent studies by academicians from the Birla Institute of Management Technology (BIMTECH), Vinod Gupta School of Management at IIT-Kharagpur, and Shailesh J Mehta School of Management at IIT-Bombay have found that retail prices for none of the suspended commodities fell after the suspension of their futures trading.

In contrast, volatility in many of these commodities increased significantly, indicating that retail prices were influenced more by domestic and international demand-supply dynamics than by futures trading.

The studies also highlighted that without futures contracts, Farmer Producer Organisations cannot hedge against price fluctuations, leaving them vulnerable to market volatility, it said.

“Commodity exchanges play the crucial role of addressing the issue of price volatility by providing training, warehousing facilities, price anchors, quality checks, and better bargaining power,” said the BIMTECH study.

The BIMTECH and IIT-Kharagpur studies focused on soyabean, soya oil, mustard seed, and mustard oil, while the IIT-Bombay study examined the impact of suspension on mustard, refined soy oil, soybean, chana, and wheat. The BIMTECH study also revealed that the retail-to-wholesale price difference increased during the post-suspension period, compared to the pre-suspension period. For mustard oil, the difference rose to ₹11.97 from ₹9.22.

In 2008, a committee led by economist Abhijit Sen found no evidence of volatility in spot prices due to futures trading.

Similarly, in 2010, the RBI studied the impact of futures trading on the price of agricultural products between 2004 and 2009. The central bank’s findings were in line with those of the Abhijit Sen committee.