India's market regulator today ordered a year-long suspension of futures trading in key agricultural commodities as the world's largest importer of vegetable oils and a major producer of wheat and rice struggle to curb food inflation.
India's most dramatic move since allowing futures trading in 2003 threatens market confidence by making it difficult to hedge during a period of record highs in producer prices, weeks after farmers ended protests that led to controversial reforms being scrapped.
“It's like shooting the messenger who brings the bad news. But we understand the government because they are concerned about edible oil inflation, ”Atul Chaturvedi, president of the edible oil trading organization, Solvent Extractors Association of India, told Reuters.
In its order, the market surveillance authority informed the commodity exchanges not to give up any futures contracts for soybeans, soybean oil, raw palm oil, wheat, paddy rice, chickpeas, green gram, rapeseed and mustard for a year.
No new positions in these commodities are allowed for existing contracts, the regulator added.
Traders said the government, faced with heavy pressure to curb food prices ahead of the major state elections early next year, wants to stem speculation that may have fueled the surge.
"Sense or nonsense, it doesn't matter," said a vegetable oil trader who was looking for anonymity. "The government really wanted to do something."
Indian cooking oil prices hit records this year, prompting New Delhi to cut taxes on imports of palm, soybean and sunflower oils in October. However, the move had limited impact as global prices remain high and volatile.
Monday's move makes it difficult for edible oil importers and traders to do business as they heavily use domestic exchanges to hedge their risk, said Sandeep Bajoria, CEO of edible oil broker and consultancy Sunvin Group.
“The flow of imports would slow down in the short term as traders don't have a hedging platform,” Bajoria added.
Small buyers and traders will be hardest hit by the move as they face both volatile global prices and the devaluation of the rupee, said a trader for a global trading company.
"The impact on large trading houses is limited," added the trader. "They protect themselves through their overseas subsidiaries with Bursa Malaysia and Chicago Board of Trade. Small traders can't. They need multiple authorizations."
The local National Commodity And Derivatives Exchange (NCDEX), which gets most of its volume from trading in agricultural commodities, will also be hard hit, said an industry senior official.
Soybeans, soybean oil, rapeseed and chickpeas were the most active contracts on the NCDEX, and the suspension deprives the exchange of any commodities to generate significant volume, the official said.
"The Multi Commodity Exchange will not suffer much as it generates most of the volume from metals and energy," added the official.
The combined average daily sales of soybean oil, soybeans, canola and chickpeas on NCDEX so far in 2021 was 12.7 billion rupees ($ 167 million), according to stock market data.
While soybean prices fell after the suspension and fell 3.5% in the spot market, trading sources say the futures freeze was not expected to fully resolve India's food inflation problems.
"India is import-dependent on edible oils and domestic prices are dictated by global benchmarks. Suspending local futures will not solve the problem," said a Mumbai-based trader for a global trading company.
MCX's shares fell 5.2% on Monday.
Source
Hansa Terminhandel GmbH