Saturday, June 14, 2008

Financial speculators and ban on futures trading

"In Washington, financial speculators are being blamed for high gas prices, soaring grocery bills and volatile commodity markets, and lawmakers are lashing out at market regulators for not cracking down on them more vigorously," says this article in New York Times. Even billionaire George Soros, has said that speculation has spurred the rise in crude prices. The phenomenal increase in the commodity prices have turned the attention of the authorities on the speculators who are otherwise viewed as performing an important function by bringing liquidity to the market.

The Indian Context
The runaway price rise in India has prompted the authorities to extend
ban on futures trading in respect of some commodities to cool prices. But Chairman of the Forward Markets Commission, B.C. Khatua, says the ban on futures trading in some agri commodities is resulting in illegal or ‘dabba’ trading. Interestingly, earlier some traders' groups themselves sought delivery-based forward trading (instead of futures trading), a system that will considerably prevent large scale flow of speculative funds chasing commodities in genuine short supply.

Mint says that instead of taming inflation, futures ban has seen prices rising and may result in illegal trade and hoarding. An article in Mint argues that the current trend of rising prices has put a question mark on the role of futures markets in fuelling inflationary tendencies in the economy. As less than 2% of farmers were aware of the futures market, leave alone participating in it, the general belief is that it is the speculators who are participating and influencing inflationary trends. Unfortunately, the signals which policy makers would otherwise get by the functioning of a well established futures market, would now not be available for the policy makers. As far as India is concerned, my feeling is that conclusive evidence that only speculators are the reason for the price rise is yet to come, though too many people including politicians, bureaucrats and strangely even traders groups themselves have blamed it all on speculators.