Futures Markets Are Helping in Price Dissemination Across India

Ten years ago, housewives trusted the neighbourhood shop for the price of grain and the family jeweller for the price of gold. Today, one can surf any channel or glance at any newspaper for commodity price information. Awareness about commodity prices has been made possible due to the unstated contribution of futures exchanges in India. The benefits that the country has derived by way of price dissemination promoted by futures exchanges remain unacknowledged. Traders can no longer fool consumers or producers.

The notion of nonmonetary benefits might sound strange but upon reflection, it makes perfect sense. Over the years, middlemen had greatly benefited by price opacity. However, the very fact that futures market in India has created an environment whereby everyone cannot be fooled about the price at all times is an acknowledgement of its contribution. The market has certainly moved towards a more transparent base.

Not many countries in the world can boast commodity market yards where computers installed at commission agents’ office disseminates crop price information. India is one of the few in the world. The price dissemination technology that is being used by the Indian commodity exchanges is the best price outreach programme in the world in contrast to many of the established exchanges in the world where it hardly gets out of the offices of the financial intermediaries.

Price discovery made on APMC yards, which are mostly fragmented over-the-counter markets, cannot deliver desired results because price discovery in spot market is affected by geographical dispersion, differential needs of buyers and sellers in terms of quality, quantity, place of delivery and difficulties associated with handling physical delivery and absence of option to settle the contract by payment of price difference. The spot market does not meet the need for price forecast felt by the participants in the physical markets. However, reference prices of commodities are reliably available on national future exchanges. Ten years ago, in the absence of such reference prices, deal structuring took more time or sometimes had to be abandoned.

We must acknowledge that the commodity futures market is an important vehicle for modernisation of the organised market. The primary social benefit from the commodity futures market is informed production, storage, and processing decisions. Well functioning markets can assist in stabilising prices by providing signals to producers to increase production of key commodities that are in short supply. Commodity price awareness of common man proves that the first stage of growth has already happened and the futures exchanges have contributed largely into this market evolution.

Published in The Economic Times