Govt bans futures trading in seven commodities. Here’s all you need to know

The government on Monday suspended futures trading in seven agricultural commodities with immediate effect to keep a check on rising food prices and inflationary pressures.

The Securities and Exchange Board of India (SEBI) issued directions to stock exchanges running a commodity derivatives exchange to suspend trading in the seven commodities.

So, what are these seven commodities?

SEBI said futures trading won’t be allowed in paddy (non-basmati), wheat, soybean as well as soya-derived products, crude palm oil, and moong, a type of pulse.

Futures trading in chana and mustard seed as well as agricultural products derived from mustard, which were banned in August and October, are also part of the list.

How long is the ban for? And what happens to existing contracts?

The ban has been implemented for a period of one year. “No new contract shall be launched till further order,” SEBI said, adding that “no new positions will be allowed to be taken in running contracts”.

SEBI has, however, allowed traders to square off existing positions in running contracts.

Why did the government impose the ban?

The ban is aimed at controlling inflation, especially after data last week showed that India’s wholesale price index (WPI) inflation hit a record high of 14.23% in November. This is the highest level for WPI inflation since the launch of the 2011-12 series. In fact, WPI inflation remained in double digits for the eighth straight month in November.

High WPI inflation raises fears of a spike in retail inflation in coming months. Rising retail inflation, in turn, raises the likelihood of monetary tightening measures by the Reserve Bank of India (RBI).

Retail inflation as measured by the Consumer Price Index (CPI) stood at 4.91% for November 2021, a three-month high. While this is lower than the level of 6.93% in November 2020, the fact that inflation climbed despite a cut in petroleum prices has worried policymakers. 

Moreover, the November data showed a spike in food inflation to 1.87% from 0.85% in October due to rise in prices of vegetables. Clothing and footwear inflation was 7.94% in November from 7.39% in October.

Is inflation a concern in other countries, too?

Yes, it is. In fact, while the RBI kept its policy rates unchanged earlier this month to support economic recovery, some major central banks around the world have already started focusing on controlling inflation.

Rising inflation is a major global concern with central banks adopting a more hawkish monetary policy stance and tapering fiscal stimulus measures (bond-purchase programmes) that were introduced in early 2020 due to the coronavirus pandemic.

So, what actions specifically have other central banks taken so far?

Last week, the Bank of England became the first major central bank in the world to raise interest rates since the beginning of the pandemic.

In a move that shocked equity investors, the BoE raised the bank rate to 0.25% from 0.1%. It said it had to act fearing that inflation would reach three times its target level of 6% by April next year even as current threats of the Omicron coronavirus variant sweeps Britain.

The US Federal Reserve avoided any drastic changes to its monetary policy last week. But it announced it would speed up the end of bond purchases and paved the way for two-three interest rate hikes by the end of 2022 due to high inflation.

The eurozone’s European Central Bank also confirmed it would stop purchases under a bond-buying programme in March 2022.