India has halted futures trading in certain types of commodities in an effort to combat inflation by reducing speculation. Observers argue this is likely to be ineffective, arguing that the price rise is fundamentally driven.
It is true that just about every major economy ex the US and Japan is suffering from inflation (and most Americans think inflation is worse than the Consumer Price Index indicates). It is also true that new institutional and retail cash continues to move into commodities, which says the concerns about speculation aren’t baseless (although soyabean oil, rubber, and potatoes, which are not included in the GSCI or other indices favored by financial investors, are not obvious candidates for new financial entrants. Morevoer foreign funds are not permitted to participate in India’s exchanges).
India is hardly alone in trying to dampen frothy-looking markets. The Wall Street Journal reports that a Senate bill to dampen speculation by increasing cash collateral requirements has earned the disapproval of James Newsome, the acting head of the CFTC. Newsome argues that the new rules would simply drive trading to other exchanges. That may well be true, but governmental concern about burgeoning commodities prices is so widespread that a coordinated attack, such as a joint rise in margin requirements, isn’t out of the question.
India, the world’s second-largest buyer of vegetable oils, banned futures trading in soybean oil, rubber, chick peas and potatoes as the government intensified efforts to cool inflation that’s at the highest in more than three years.
Trading has been halted for at least four months from today…
Communist allies of Prime Minister Manmohan Singh want to ban futures trading in cooking oil, sugar and other commodities, saying speculators are driving up prices. Still, the order comes a week after a government-appointed panel found no evidence a 2007 ban on wheat and rice futures curbed prices of the grains….
The government-appointed panel chaired by economist Abhijit Sen last month didn’t recommend extending the ban to other food commodities, saying there was no conclusive evidence to suggest futures trading contributed to price increases.
“Prices may start to rise again if supply-side constraints are not eased,” Si Kannan, associate vice president at Kotak Commodity Services in Mumbai, said by phone. “The ban is a short-term measure.”
India’s inflation accelerated to 7.57 percent in the week ended April 19, the fastest pace in more than three years….
Domestic traders, producers and consuming companies are the main participants in India’s commodity exchanges, compared with the 13 million people in the country who invest in stocks. Overseas funds aren’t allowed to trade Indian commodity futures.