Commodity Market Inefficiencies and Inflationary Pressures - India’s Economic Policy Dilemma

With the current pace of growth, India would emerge as a major player in the international market in terms of commodity consumption, production and trade. Going by trade volume and also the possibly as an identifiable influence on the price making process on the essential commodities, the futures and spot markets have shown major variations. Increased volatility in asset prices has been a major reason behind the integration of domestic financial markets with the international financial sector accentuating the demand for the trading in the derivative market. Though organized commodity trading has been in from the nineteenth century in India, the commodity derivative markets in the new form with nationwide electronic trading and access have opened the gates for speculators, hedgers and other market participants to capitalize on the development. The robust growth of the commodity markets can be observed in terms of number of commodities trade volumes and growing number of both the market participants and the commodity exchanges. Liquidity booms reflected by loose monetary policy are responsible for major surge in commodity prices globally in addition to direct tangible impacts of oil prices especially in developing countries with heavy oil imports like India. Futures markets are created to fulfill genuine desires economic functions of hedging and price discovery. But, enormous futures trading observed on the commodity exchanges have raised a host of issues like inflation guided by the fuelling principle implying the direct relationship between volatility and inflation. Huge price volatility in futures segment on the commodity exchanges has therefore raised concerns relating to the market efficiencies, infrastructure and knowledge and also their consequential impact on cash markets. The demand and supply side of the commodity price mechanism is traditionally governed by numerous factors including the climatic conditions, availability of critical inputs and government policies. The consumer wholesale price index is loaded towards food prices that are primarily composed of commodity prices. Masters of the policy reforms are in a dilemma situation on various fronts – (a) to import or not? (b) What should be the interest rates reflected by the monetary policy, (c) can we or should we control monetary inflows from outside? (d) Should we support the farmers or the consumption masses? In addition, how and to what extent futures trading be allowed on the commodity exchanges and how to curb the loopholes in the commodity market.