India's Marxists Win: More Futures Trading Banned

♠ Posted by Emmanuel in , at 5/08/2008 03:24:00 PM
In an earlier post, I mentioned the efforts of the ruling coalition's communist allies to promote further bans on futures trading in India. Despite government-sponsored research which suggests futures trading in India is not responsible for rising prices, the government has acquiesced to communist appeals anyway in banning yet more futures trading in other commodities. Although the government says it is a temporary measure aimed at gauging whether prices can be controlled through restricting futures trading in these commodities, the obvious point is that the Congress Party has determined that the calculus of consent with upcoming elections requires throwing a bone to the communists. It's a shame that communist parties are a rarity in the West as they do add a degree of liveliness to electoral proceedings regardless of whether their policies actually help. From Bloomberg:

India, the world's second-largest buyer of vegetable oils, banned futures trading in soybean oil, rubber, chickpeas and potatoes as the government seeks to rein in the fastest inflation since 2005. The Forward Markets Commission halted trading for at least four months from today, Anupam Mishra, a director at the market regulator, said last night in a phone interview. Trades will be settled at yesterday's closing price.

Communist allies of Prime Minister Manmohan Singh want to ban futures in cooking oil, sugar and other commodities to tame inflation that reached 7.57 percent last month. While a study found no evidence that halting rice and wheat futures last year curbed prices, the government needs to keep food affordable for the half the 1.1 billion people who live on less than $2 a day.

``Halting futures trading will probably have little impact on Indian inflation,'' Anne Frick, a senior oilseed analyst for Prudential Financial in New York, said in an e-mail. ``World soy- oil prices are up due to fundamental factors, not speculation...''

The four commodities banned by India have a daily traded value of about 12 billion rupees ($288 million) on the Multi Commodity Exchange of India Ltd. and the National Commodities & Derivatives Exchange Ltd., according to the regulator. Trading of all commodities on India's 23 exchanges totaled $922 billion in the year to March.

Finance Minister Palaniappan Chidambaram said on May 4 the government may halt some contracts because of political pressure to see ``if it has any impact at all on inflation.'' The government-appointed panel chaired by economist Abhijit Sen last month didn't recommend extending the ban to other food commodities, saying there was no conclusive evidence to suggest futures trading contributed to price increases.

Chickpeas futures surged 89 percent in the past 12 months on the National Commodities exchange, while rubber rose 41 percent and soybean oil advanced 21 percent in the period. ``Prices may start to rise again if supply-side constraints are not eased,'' Si Kannan, associate vice president at Kotak Commodity Services in Mumbai, said by telephone. ``The ban is a short-term measure.''

The government halted futures trading in wheat and rice last year and lentils in 2006 to check a surge in local prices. A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date.

India's imports of palm oil and soybean oil may be as high as 570,000 tons in May and June and may increase to as much as 700,000 tons a month starting in July, Dorab Mistry, a director at Godrej International Ltd., said last month. The South Asian nation relies on imports to meet half its edible-oil needs, buying palm oil from Indonesia and Malaysia and soybean oil from Argentina and Brazil.

Rubber-growers don't expect the ban to have a significant impact because they don't rely on the futures market to price their crops, Sajen Peter, chairman of the state-run Rubber Board, said in an interview today. ``Indian farmers get the highest farm-gate price anywhere in the world and don't depend much on the futures to formulate their selling strategies,'' he said in the southern city of Cochin.

Kerala state accounts for more than 90 percent of India's rubber production, the world's fourth-biggest. Domestic traders, producers and consuming companies are the main participants in India's commodity exchanges, compared with the 13 million people in the country who trade stocks. Overseas funds aren't allowed to buy and sell commodity futures. China is the biggest buyer of vegetable oils.