Another year of futures ban in seven agri-commodities likely?

Another year of futures ban in seven agri-commodities likely?

Subject: Economy

Section: Capital market

Context: Finance Ministry through SEBI continues ban on 7 agri commodity futures for another year.

Key Points:

• Futures trading in seven agriculture commodities on the National Commodity & Derivatives Exchange (NCDEX) is likely to remain suspended until December next year.
• The move is seen as linked to the political inconvenience of rising food prices ahead of state and general elections.
• The proposed extension for a year beyond 20 December comes in the face of opposition from the NCDEX and the cabinet secretariat.

Why is the NCDEX and cabinet secretariat opposing the ban?

• NCDEX and the cabinet secretariat sought a review of the ban to enable partial revocation of suspension in derivatives trading in edible oils and mustard seed.
• The continuation of the suspension will shut down the exchange and the ecosystem created over 20 years will collapse.
• Government also received many representations from edible oil associations urging the removal of the ban amid deflation in edible oil.

What are the benefits of future trade in agri commodities:.

• Futures trading in agricultural commodities helps in price discovery, risk management, and market liquidity.
• For agricultural producers, these markets provide an essential tool for locking in prices, mitigating price volatility, and ensuring a stable income.
• They also facilitate hedging to safeguard against adverse price movements and support better management of storage and transportation considerations.
• Investors benefit from the opportunity to diversify their portfolios while taking part in global agricultural markets.

When were agri futures first banned? 

• Finance ministry through the Securities and Exchange Board of India (Sebi) first imposed the ban in 2021, halting futures trading in seven commodities non-basmati paddy, wheat, chana, mustard seeds and its derivatives, soybean and its derivatives, crude palm oil and moong (green gram)—for a year to combat rising inflation.

Why were they banned?

• The issue goes into the heart of a delicate matter of political economy— whether or not widely consumed agricultural commodities such as pulses and rice should be allowed to be traded on the exchange, given their likely impact on food security.
• Futures trading in agricultural commodities can contribute to price swings and speculation.

Who administers agri commodity futures?

• The Forward Markets Commission (FMC) was the primary regulator until it was merged with the Securities and Exchange Board of India (SEBI) in 2015, which now oversees the commodity derivatives market.