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Role of Commodity Futures Market in Spot Price Stabilization, Production and Inventory Decisions with Reference to India

Author

Listed:
  • Basab Dasgupta

    (Department of Economics, University of Connecticut, 347, Mansfield Road, Storrs, Connecticut - 06269)

Abstract

The findings of this paper suggest that the allegation against futures market in India 'that it distorts the spot market price and creates artificial scarcity by allowing unnecessary hoarding', is a misconception. This paper finds out that there is a co-movement among futures price, production decision and the inventory decision. With the assumption that future market is monopolistically competitive, the paper finds that future price elasticity of production always being greater than or equal to one, an increase in profit by increasing price is not possible. Therefore, the doubt about its distorting effect on spot price can be ruled out. The suspicion about the increasing hoarding resulting from futures market can also be proved unjustified from results. Our results show that futures price elasticity of inventory is inversely related with the carrying cost. Therefore, an unnecessary hoarding will increase the carrying cost leading to a lower responsiveness of inventory to futures prices. This paper also finds out the effect of expected production shocks on futures price elasticity of supply.

Suggested Citation

  • Basab Dasgupta, 2004. "Role of Commodity Futures Market in Spot Price Stabilization, Production and Inventory Decisions with Reference to India," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 39(2), pages 315-325, July.
    • Handle: RePEc:dse:indecr:v:39:y:2004:i:2:p:315-325
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    Citations

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    Cited by:

    1. Shernaz Bodhanwala & Harsh Purohit & Nidhi Choudhary, 2020. "The Causal Dynamics in Indian Agriculture Commodity Prices and Macro-Economic Variables in the Presence of a Structural Break," Global Business Review, International Management Institute, vol. 21(1), pages 241-261, February.
    2. Pravakar Sahoo & Rajiv Kumar, 2009. "Efficiency and Futures Trading-Price Nexus in Indian Commodity Futures Markets," Global Business Review, International Management Institute, vol. 10(2), pages 187-201, July.
    3. Mohanty, Sunil K. & Mishra, Sibanjan, 2020. "Regulatory reform and market efficiency: The case of Indian agricultural commodity futures markets," Research in International Business and Finance, Elsevier, vol. 52(C).
    4. Ashutosh Vashishtha, 2020. "Cobweb price dynamics under the presence of agricultural futures market: theoretical analysis," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 67(2), pages 131-162, June.

    More about this item

    Keywords

    Commodity Futures in India; Production Shock and Futures Price; Futures Decision with Inventory;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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