The Indian government has extended the suspension of derivatives trading in seven key agricultural commodities until January 31, 2025, citing concerns that such trading could further fuel inflation. This marks the third extension since the ban was first introduced in December 2021.

Commodities Affected by the Ban

The ban applies to derivatives trading on the following commodities:

• Non-basmati paddy
• Wheat
• Chana (chickpeas)
• Mustard seed and its derivatives
• Soybean and its derivatives
• Crude palm oil
• Moong

This suspension affects online trading platforms regulated by the Securities and Exchange Board of India (SEBI). The regulator first issued the directive on December 19, 2021, instructing exchanges to halt derivatives trading in these seven commodities. The ban was extended twice before being pushed further to January 2025.

Impact on Agricultural Derivatives Trade

The ban has significantly impacted platforms like the National Commodity & Derivatives Exchange (NCDEX), which focuses on agricultural commodities. NCDEX had developed an extensive ecosystem for agricultural derivatives trading, including third-party warehousing, quality assurance, and smooth commodity delivery upon contract expiry. The exchange also worked with Farmer Producer Organizations (FPOs) to encourage farmer participation in the derivatives market.

Studies Highlight Mixed Results

Recent studies by institutions such as BIMTECH, IIT-Kharagpur, and IIT-Bombay revealed:

• Retail prices for the banned commodities did not decrease after the suspension of futures trading.
• Price volatility increased for many of these commodities, driven more by domestic and global demand-supply dynamics than by derivatives trading.

The studies also pointed out that the absence of futures contracts has left FPOs without tools to hedge against price fluctuations, increasing their vulnerability to market uncertainties. For instance, the retail-to-wholesale price difference for mustard oil rose from USD 0,11 per kg to USD 0,14 per kg after the suspension.

Historical Findings on Futures Trading

Earlier studies, such as the 2008 Abhijit Sen Committee report and a 2010 RBI study, found no evidence that futures trading caused volatility in spot prices for agricultural products. These findings challenge the notion that derivatives trading drives inflation.

Industry Reactions and Expectations

Ajay Kumar, Director of Kedia Commodities, noted that the one-month extension could indicate plans for policy changes in the upcoming budget. Meanwhile, the edible oil industry has urged the government to lift the ban, citing challenges faced by smaller players who lack hedging platforms, unlike larger firms that utilize global markets.

Kayomarz Sadri, CEO of Abans Enterprises, viewed the short extension positively, suggesting that some commodities may see a resumption of futures trading next year. “We could see trading resume for at least two or three of the banned commodities,” he added.

Conclusion

The extended ban on derivatives trading underscores the government’s cautious approach to managing inflationary pressures. While it aims to stabilize prices, the decision has drawn mixed reactions from stakeholders, with many calling for a revival of futures trading to restore market efficiency and hedging opportunities.









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