India bans futures trading

The Sun: The Indian government has banned futures trading in four commodities to tame inflation. The finance ministry late Wednesday banned futures trading in chana, soya complex, rubber and potato to check the rising prices of food grain and other essential commodities. Only a day later, a member of an official expert panel has questioned the move, saying it would only hurt farmers. Sharad Joshi, a farmers leader and member of the government's Expert Committee of Futures Market, termed it as an unfortunate move.“The committee has made it clear that the forward markets have nothing to with inflation. Futures trading in in fact helping farmers get better prices for their produce. The ban will affect the farmers,” he said. India's annual rate of inflation has been hovering well over seven percent in recent weeks, putting the government under pressure.

MyTake: Very bold and drastic move by the Indian Forward Markets Commission to stop futures trading. I guess it is easier to do it in a "localised" futures market compared to a "internationalised" futures market. In fact. India has a year ago banned rice and wheat futures. Will all these steps help to lower inflation? Will stopping futures trade or intervening causes commodities shortage as no farmers will plough the land as the prices remains low and unprofitable? To answer this lets look at the broader markets. Firstly, let us analyse the reasons for price increase in a futures market. Price increase are mainly due to a) increased demand(eg China, India, Middle East and other emerging countries' consumption have been increasing rapidly as the population becomes more affluent), b) supply interruption(due to social/political situations), c) weakening of a main trading currency USD(due to US monetary loosening policy), d) increased money supply(ie "printing money" into the economy resulting "too much money chasing too few goods" and e)speculation. There are many suggestions raised to counter the price increase. Some of the main proposals are: 1) slows down growth of emerging countries, 2) "force" the US to appreciate USD, 3) appreciate own country's currency, 4) raised interest rate further, 5) increased banks' reserve ratio further, 6) intervention in the futures market (egs currency and oil) and etc. Nobody exactly know the correlation of the solutions above to lower prices as they are many factors to take into account. Take example of appreciating own currency and raising interest rates. Over the last year or so, currencies and interest rates of China and Australia have gone up substantially but these countries are still having high inflation problems. My solutions to lower futures prices while taking into the account of ever increasing demand would be to 1) pressure the US to start appreciating its dollar again, 2) start tightening and amending the rules and regulations pertaining to futures trading to minimise speculation or manipulation (egs increased deposit amount of futures contract, requiring all buyers/sellers stating their reason for buying/selling with supporting documents and investigate all big programmed buying/selling contracts etc) and 3) sudden concerted intervention by Governments in the futures markets*(but I suspect it will be difficult to be implemented as it would be costly and subject to heavy criticism). I will not recommend stopping futures trading all together. I know it will be difficult to determine who are genuinely buying the product for hedging, trading, speculating or manipulating. Intervention may distort efficient pricing and against the free market spirit but if nothing is done now, how sure are you that the price we are buying now are not distorted and efficient?

* Just to refresh our minds, HK government in August 1998 successfully intervened in the stock market and related futures market from collapsing and managed to chased away speculators and manipulators. The manipulators were having a good time in HK before that as they "double market play" by shorting the markets and its currency at the same time and nearly brings HK to its knees. At that time, the Hang Seng index has fallen over 50% in the preceding year due to the collapse of stock and property markets. Money spent on intervention- HKD120b.