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Regulator’s Decision and Risk Management: The Case of India

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  • G.K. Chetan Kumar
  • K.B. Rangappa
  • Suchitra S

Abstract

Whenever Indian Economy had to tackle significant inflationary pressure, Securities Exchange Board of India (SEBI), which is the apex regulator of capital and commodity markets, has time and again resorted to stop the trade in futures of essential agricultural commodities while allowing trade in futures of essential energy commodities. SEBI has justified the step on the grounds that, doing so prevents volatility in agricultural spot market. Our study tries to analyze the nature of correction in the two segments with the help of vector error correction model in the backdrop of inflationary and non-inflationary periods. In energy segment, among select commodities, the speed of error correction was 1to 2 days more as compared to non-inflationary period. With regards to commercial agricultural segment, the rate of error correction among select commodities was 4 to 7 days more as compared to non-inflationary period. Given the underdeveloped nature of agricultural futures market, SEBI’s action seems bit too stringent. Although prior studies have been undertaken about Indian spot and derivative markets, empirical studies which have focused on analyzing economic rationale of SEBI’s decision of restricting trade in agricultural futures during inflation are scarce. Our study tries to bridge the gap regarding the same.

Suggested Citation

  • G.K. Chetan Kumar & K.B. Rangappa & Suchitra S, 2022. "Regulator’s Decision and Risk Management: The Case of India," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 14(2), pages 133-142, December.
  • Handle: RePEc:rfb:journl:v:14:y:2022:i:2:p:133-142
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    1. Erik Theissen, 2012. "Price discovery in spot and futures markets: a reconsideration," The European Journal of Finance, Taylor & Francis Journals, vol. 18(10), pages 969-987, November.
    2. Ramakrishna, R. & Jayasheela, 2009. "Impact of Futures Trading on Spot Market and Price Discovery of Futures Market," Indian Journal of Agricultural Economics, Indian Society of Agricultural Economics, vol. 64(3), pages 1-13.
    3. Xin Jin, 2017. "Do futures prices help forecast the spot price?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 37(12), pages 1205-1225, December.
    4. Amrouk, El Mamoun & Grosche, Stephanie-Carolin & Heckelei, Thomas, 2017. "An analysis of the interdependence between cash crop and staple food futures prices," Discussion Papers 265665, University of Bonn, Institute for Food and Resource Economics.
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