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GS Paper 3:
Topics Covered: Indian Economy and issues related to planning.
The suspension of futures trading in agri products:
Context:
The Securities & Exchange Board of India (SEBI) has issued directions to stock exchanges in commodity derivatives segment for immediately suspending trading in derivative contracts in key farm commodities namely paddy (non-basmati), wheat, chana, mustard seeds and its derivatives, soya bean and its derivatives, crude palm oil & moong for a year.
- It is being suspended to reign in the rising prices of these essential commodities which is fuelling inflation.
What are derivative contracts?
- Derivative contracts are contracts between two or more parties where the derivative value is based upon an underlying asset, in this case agri commodities.b
- The price of the derivatives are established by the price fluctuations of the underlying assets.
- Derivatives can be traded on an exchange or over the counter (OTC).
How does the system work and what are derivatives trading?
Derivatives trading takes place when traders speculate on the future price of an asset through buying or selling of derivative contracts to maximise profit as compared to buying the underlying asset outright.
- Traders also use derivatives for hedging to minimise risk against an existing position.
- With derivatives, traders can go short and make profit from falling asset prices.
- They also use derivatives to hedge against any existing long positions.
- The ultimate objective is to profit. This is viewed as a deterrent to bring in price discipline in the market.
Why suspension?
- To reign in on the rising prices of these essential commodities which is fuelling inflation. India is the world’s biggest importer of vegetable oils 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.
- It is believed that speculators have a role in jacking up of prices and this needs to be discouraged to curb inflation and support growth as the economy is recovering from the COVID-19 impact.
Sources: the Hindu.
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