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SEBI suspends Futures Trading in key farm crops

  Jan 23, 2022

SEBI suspends Futures Trading in key farm crops

Q What is the context  ?

A Market regulator Securities & Exchange Board of India (SEBI) has issued an order suspending futures trading in paddy (non-basmati), wheat, Bengal gram (chana dal), mustard seeds and its derivatives, soyabean and its derivatives, crude palm oil and green gram (moong dal) for a year.

Q What are Derivatives?

Q What are various types of Derivatives ?

A The most common types of derivatives are futures, options, forwards and swaps:

 1. Futures

 2.  Options

3.  Forwards

4.  Swaps

Q What are Agri-Futures?

A Like equity, currency or interest rate futures, they allows to buy or sell an underlier at a preset price on a future date. All agri contracts end in compulsory delivery.

National Commodity & Derivatives Exchange Limited (NCDEX) is an Indian online commodity and derivative exchange. It is under the ownership of Ministry of Finance.

Q What are the reasons for this ban?

A 1.  To cool off Food Inflation

2. Double Digits WPI

3. To insulate future Price Shock

Q What will be the impact?

A 1. The imports in such commodities, especially edible oils, would reduce in the short term as traders will not have a hedging platform.

2. It is believed that speculators have a role in jacking up prices and this needed to be discouraged to curb inflation and support growth as the economy is recovering from the COVID-19 impact.

3. India is the world’s biggest importer of vegetable oil and this measure will make it difficult for edible oil importers and traders to transact business since they use Indian exchanges to hedge their risk.

4.  Agri-futures, driven mainly by NCDEX, have a checkered history with bans often pushing NCDEX back.

Q What are the other steps taken?

Q What can be way forward ?