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The Impact Of Commodity Transaction Tax On Futures Trading In India: An Ex-Ante Analysis

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  • PRAVAKAR SAHOO

    (Institute of Economic Growth (IEG), Delhi University, New Delhi, India)

  • RAJIV KUMAR

    (Indian Council for Research on International Economic Relations (ICRIER), India Habitat Centre, New Delhi, India)

Abstract

Trading in commodity derivatives on exchange platforms is an instrument to achieve price discovery and better price-risk management besides helping the macroeconomy with better resource allocation. In the 2008–2009 budget, the Indian government proposed to impose a commodity transaction tax (CTT) amounting to 0.017% of trading value. In this context, we examine the relationship between trading activity, volatility and transaction cost for five most traded commodities in India. Results suggest that there exists a negative relationship between transaction cost and liquidity and a positive relationship between transaction cost and volatility. Further, the results of structural model support the results of VAR analysis. Therefore, if the government imposes CTT, it would lead to higher volatility and lower trading activity affecting market efficiency and liquidity.

Suggested Citation

  • Pravakar Sahoo & Rajiv Kumar, 2011. "The Impact Of Commodity Transaction Tax On Futures Trading In India: An Ex-Ante Analysis," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 56(03), pages 423-440.
    • Handle: RePEc:wsi:serxxx:v:56:y:2011:i:03:n:s0217590811004328
    DOI: 10.1142/S0217590811004328
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    Citations

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    Cited by:

    1. Sanjay Sehgal & Tarunika Jain Agrawal, 2019. "Impact of Commodity Transaction Tax on Market Liquidity, Volatility, and Government Revenues: An Empirical Study for India," Vikalpa: The Journal for Decision Makers, , vol. 44(1), pages 12-29, March.
    2. Muneesh Kumar & Tarunika Jain Agrawal & Srishti Sehgal, 2017. "Domestic and International Information Linkages for Indian Commodities Market in the Pre- and Post-CTT Periods," Metamorphosis: A Journal of Management Research, , vol. 16(2), pages 75-91, December.

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    More about this item

    Keywords

    Commodity transaction tax; futures market; liquidity; volatility; G19; G13; G14;
    All these keywords.

    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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