Futures market trading in agricultural commodities was widely prevalent in India till about 1950, but the Government of India banned such trading in the country through a specific legislation in 1951 and all these exchanges were shut down only to be restarted in 2000 with the repealing of the legislation by the Government. The main commodity exchanges that were established in India post the opening up of the sector in 2000 are the National Commodities and Derivatives Exchange (NCDEX) and the Multi-Commodity Exchange (MCX); NCDEX emerged as the primary market for agricultural commodity futures while MCX became the primary market for non–agricultural commodity futures. Apart from NCDEX and MCX, there are four other exchanges in the country.
The existence of futures markets is heavily dependent on regulatory approvals, unlike spot markets which can exist independently. The rationale for the existence of these markets is to ensure an appropriate price discovery, and hence maximum benefit to both the buyer and the seller. The convergence or integration of the spot and futures price can lead to a more efficient market as that would allow the traders to create strategies for both hedging and speculation using both markets, and thus have access to a larger set of opportunities. The absence of this convergence leads to the inability of using such strategies, and in some cases even leads to adoption of wrong strategies leading to huge losses for the traders. The problem is more acute in developing markets such as India where the potential divergence is even higher, leading to potential mispricing of the products in the market. The problem is further compounded, particularly in emerging markets, by regulatory barriers and imperfections.
It is against this backdrop that as a part of the 7th India Finance Conference held at IIM Bangalore, a panel discussion on the benefits of integrating the spot and futures markets was organised. The idea behind this discussion was to debate the current state of the spot and futures markets in India, the steps needed to better integrate the two markets and the benefits that could be derived from it.
