Retrograde move – The Hindu BusinessLine

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Trading suspensions are anathema to free markets; SEBI ban will kill the ailing agri derivatives market

The Securities and Exchange Board of India’s (SEBI) order suspending trading in seven agri commodity derivatives is an ill-advised move that will impede the growth of this segment. The curb on trading in futures and options of paddy, wheat, chana, mustard seeds, soya bean, crude palm oil and moong was at the behest of the Department of Economic Affairs and seems to have been aimed at arresting the price inflation in these commodities. But in doing so, the market regulator is taking away an effective tool to shield users from price volatility and inflation. Agri futures and options play a critical role in helping farmers sell the agricultural produce and in hedging against adverse price movement. In the absence of a unified spot market for farm produce, exchange traded contracts can play a useful role in discovering price in a transparent manner. But by imposing such sudden ban on trading, the Centre is repeating the mistake it has made many times in the past. The trading suspensions enforced in the past have increased the regulatory risk in this segment, deterring large institutional investors from participating in these contracts.

If the Centre and SEBI are serious about creating a vibrant derivative market for agricultural commodities, then the suspension should be withdrawn at the earliest along with an explicit promise from the Centre that they will not be reimposed. If the Centre is worried about speculation, prices can be curbed through other means such as imposing tighter daily limits on sensitive commodities or by increasing trading margins very steeply. The regulator should also speed up efforts to increase trading volumes and participation on exchanges through creation of higher awareness among the users and farming community. A liquid market has in-built checks that prevents excessive speculation. Trading suspensions are anathema to free markets and should be avoided at all costs.

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