A look at the SEBI futures ban order and its causes and impact on the market

SEBI’s order to ban futures trading of seven Agri commodities can have impacts on the market, traders and price of related food items.

The Securities and Exchange Board of India (SEBI) banned future trading in seven agricultural commodities. These commodities are soybean, crude palm oil, wheat, rice, chickpea, green gram, rapeseed, and mustard. The SEBI order, released on Monday, 20 December 2021, instructed commodity exchanges not to launch new futures contracts in these commodities while running contracts in these commodities will not be allowed any new positions. The ban will be applicable for one year.

This move is seen as an attempt to curb the inflation rate. The consumer price-based inflation reached a three-month high in November, while food inflation increased from 0.85% to 1.87% from October to November. The wholesale price index has been in double digits every month since April this year. WPI was 12.54% in October but rose to 14.23% in November. The food index has surged by more than two times, from 3.06% in October to 6.7% in November.

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How will the ban affect the market?

In the absence of futures trading, the farmers and traders will not have a market-driven reference price. With the Rabi harvest hitting the markets in a few months, the price rise of agricultural commodities may cool off as a result of the ban. Trading in these commodities may continue, albeit at a smaller scale, in the unorganised market. 

The ban, combined with the easing of import duties on edible oil, may address the high price rise of edible oil. Notably, the government has also set a limit on the quantity that edible oil dealers can stock now. 

How will it affect existing contracts?

The ban on futures trading will be applicable for one year. No fresh contracts will be available during this period. Traders with existing contracts will be able to square off their positions. However, such square offs are possible between existing traders only through counterparty deals. 

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How have these bans affected commodity prices in the past?

Futures contract bans have been imposed on agricultural commodities in the past, almost always as a response to price rise. However, it has been observed that bans often have a short-term impact on the prices. The demand and supply in the market and financial policies continue to dictate inflation, irrespective of the trading ban. The prices of commodities like chana and wheat have continued to rise in the past despite trading bans. However, a fall in prices may be expected in the short term.

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Has there been any immediate impact of the ban?

The SEBI ban saw an immediate fall in the prices of soybean January futures by over 4%. On the National Commodities and Derivatives Exchange, the price of refined soybean futures for December fell by 0.69%, while mustard seeds futures were lower by 1.08%. The April turmeric futures were trading 1% lower after the news of the ban came out in the market. One might note that there is a general weakness in the global market due to the news of the Omicron variant of the Coronavirus.