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Saturday, March 03, 2007

Futures Trading - a reason for rising prices?

Although futures trading has been banned in pulses the prices continue to remain high. Thus the recent announcement of government banning the futures trading in wheat and rice is expected to have little effect, it might have been politically motivated to silence the left which has been demanding the ban on futures trading with the reasoning that only speculation is leading to the price increase. This however is faulty reasoning the real causes need a deeper perspective. Only four years back the there were surplus stocks of both rice and wheat, with wheat hitting a high of 60 million tonnes ( the government did relax the exports on these goods then), but now rice and wheat stocks have fallen below the minimum level. This has taken four years in the making and the only quick (knee-jerk) measures the government has taken is the relaxing the import norms for these goods. However, only an increase in agricultural productivity is right measure not only to maintain price stability, but also increase farmer well being.

The Finance minister ( during the budget) announced measures to increase farm credit for farmers by allowing rural banks to generate extra capital required for farm lending through allowing them to engage in foreign exchange business and allowing them to accept FCNR deposits among other measures. How effective these measures will be are still to be seen.

All in all one is forced to believe the Finance Minister's view that futures trading is not the reason for inflation , as the left has claimed, but a price discovery mechanism. Of course, one cannot deny that there is speculation in futures trading.

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