Did agri futures have a premature start? Economic Times debate 14th May 2008

A start has to be made somewhere
Futures trading was reintroduced in India as part of the financial liberalisation policy, which has been pursued since 1992. Being the last mile in the road to financial liberalisation, after all the other segments such as banking, capital markets, insurance, NBFCs and so on were opened up; the logical corollary was to extend the same to the commodity sphere. The response of the market has been quite remarkable as seen by the enthusiasm shown in all the commodity segments. The challenge has really been to take the benefits to the farmer level so that they can gain from futures trading. We have seen a fair participation of end-users in areas such as pulses, edible oils, cereals and spices, where processors and dealers are participating on the exchanges. Farmers in some areas are gradually getting aware of futures prices, which are being disseminated by the exchanges. This is an important step before direct participation, which is the final goal. Further, the exchanges have made some significant advances in the creation of infrastructure like warehousing, grading and assaying, which is in short supply in the country. The markets have been well behaved so far, with some pragmatic regulation being put in place by the FMC. Prudential margining and fixing of market positions have ensured that at no time the overall open interest accounts for more than 1-3% of the total availability of a product in the country. However, while the progress has been satisfactory, the absence of integration with the disparate spot markets is a challenge to overcome. That is something the exchanges are attempting to solve. The important point here is that in any venture, especially as complex as commodities, there would always be problems in terms of misconceptions, absence of market integration, efficient price discovery and so. It is also true that in the capital market, the spot market developed before the derivatives market, which made things easier. In the commodity space, the derivatives have come before the so called ‘integrated spot market’. The route is different and probably difficult, but, a start has to be made some time. Therefore, no time is premature on the road of innovation.