Explained: Sebi ban on futures trading in 7 Agri commodities and its impact

Capital and commodities market regulator Sebi today added soybean and crude palm oil to the list of Agri commodities in which futures trading has been banned, taking the total number of banned Agri commodities to seven. We take a look at the reason and the implications of the move.

Soybean and crude palm oil have been added to the list of Agri commodities in which no futures trading will be allowed. Chana, mustard, paddy, wheat, and moong were already on the list.

The ban on all seven Agri commodities will be effective for one year.

What happens to traders with existing positions in contracts of soybean and crude palm oil?

They can square off their positions. However, they will have to find a counterparty from the pool of traders with existing positions, as no fresh contracts will be allowed.

The government’s aim is to curb the galloping prices of Agri commodities, which is feeding into food inflation.

Prices of edible oil have been rising for a while now. Retail edible oil inflation was 29.7 percent in November. The government had cut import duty, and set limits on how much edible oil dealers could stock. India imports 65-70 percent of its edible oil requirement, and high domestic prices are mainly because of high prices of edible oil in the international market.

Some industry watchers feel the ban could lead to trades in these commodities shifting to the dabba or unofficial market.

The suspension comes at a time when the Rabi crop would start coming to the market in a couple of months. Both traders and farmers are likely to be affected as there will be no reference price.

The surge in commodity prices, including those of agri-commodities, had been fuelled by the easy money policy of central banks globally. With central banks now getting into tightening mode, prices of commodities, in general, are expected to cool down.

Various independent and studies by commodity exchanges have shown that such bans do not impact commodity prices in long run. This has been seen in the case of chana, wheat, etc, the prices of which continue to rise despite the ban on futures trading. In the short term, prices may fall, but over the longer term, other factors come into play.

Also, industry watchers say that such bans are never announced when commodity prices are falling