Working of Commodity Markets in India

By Madan Sabnavis

Summary

This Forum of Free Enterprise booklet reproduces the full text of Madan Sabnavis’s presentation on the working of commodity markets in India, delivered at a February 2010 seminar jointly organised by the FFE and the Economic Research Foundation of the Indian Merchants’ Chamber. Sabnavis, identified as Chief Economist at CARE Ratings with six prior years at NCDEX, sets out to demystify commodity trading. He opens by locating commodity markets among a country’s three broad price-setting financial markets (interest rates, exchange rates, and commodity prices), and distinguishes spot from derivative (futures) markets.

The core of the essay is conceptual and explanatory. Sabnavis walks through derivatives, OTC versus exchange-traded contracts, the risk policy of exchanges (margining and counter-party guarantees), and the price-discovery advantages of organised commodity exchanges over bilateral grey-market trade. He devotes sections to recurring controversies: whether futures prices converge with spot prices (weak in India because of fragmented mandis and opaque reporting), and whether futures trading is responsible for inflation — a charge he treats sceptically, noting that statistical causality tests (Granger causality, error-correction mechanisms) have not been conclusive, and that futures mainly act as a barometer of market conditions.

A historical section traces commodity futures in India from their nineteenth-century flourishing through mid-twentieth-century bans, underground forward trading, and gradual re-permission of regional exchanges. Sabnavis argues that exchanges such as NCDEX have built genuine infrastructure — warehousing capacity, assaying and grading standards, and price dissemination reaching farmers via TV, radio and electronic boards — that can let farmers hedge, time their sales, and use warehouse receipts to access finance. He concludes that commodity markets are globally accepted as efficient price-discovery systems and can play an important role in India provided regulation is made more flexible and the uncertainty around contracts being delisted or banned is removed. The booklet, sponsored by the Shailesh Kapadia Memorial Trust, carries an editor’s note by Sunil S. Bhandare and a biographical tribute to Kapadia.

Key points

• Full text of Madan Sabnavis’s presentation at a February 2010 FFE / IMC Economic Research Foundation seminar, published by the FFE in July 2010.

• The author is Chief Economist at CARE Ratings and a former NCDEX hand, lending hands-on knowledge of commodity exchanges.

• Frames commodity markets within a country’s three price-setting financial markets and distinguishes spot from derivative/futures markets.

• Explains key concepts: derivatives, OTC vs exchange-traded contracts, exchange margining/risk policy, and the efficiency of exchange price discovery.

• Addresses the spot-futures convergence problem, attributing weak convergence in India to fragmented mandis and opaque reporting.

• Rejects the claim that futures trading drives inflation, citing inconclusive Granger-causality and error-correction evidence.

• Traces the history of Indian commodity futures from the late nineteenth century through mid-century bans to staged re-permission.

• Concludes commodity markets aid price discovery and farmer hedging but need more flexible regulation and an end to arbitrary contract bans.

Generated by the v1.5 extraction pipeline. Awaiting editorial review.