India Bans Futures Trade in Wheat, Rice on Inflation
By Thomas Kutty Abraham
Feb. 28 -- India, the world's second largest producer of wheat and rice, banned futures trading in the two commodities to curb the fastest inflation in two years.
Trading will stop once existing contracts expire on the nation's three exchanges including the Mumbai-based National Commodities & Derivatives Exchange Ltd., in which Goldman Sachs Group Inc. has a stake, Forward Markets Commission said today.
The ruling Congress party-led coalition faces an opposition that's attacking Prime Minister Manmohan Singh's government for spiraling prices of farm products. Trading in wheat, rice, sugar and pulses has inflated product prices, the Communists, which support the federal government, and other parties have said.
``Mounting political pressure to combat inflation seems to have promoted the government to take this drastic step,'' said Kishore Narne, head of research at Anand Rathi Commodities Ltd., a brokerage in Mumbai. ``Trading volumes in other agriculture commodities will also dry up.''
Wheat for March delivery fell as much as 1 percent to 947 rupees per 100 kilograms on the National Exchange. Contracts for June and July declined 2.8 percent and 2.4 percent respectively. Before today, wheat had gained 26 percent in the past 10 months, tracking a 35 percent gain on the Chicago Board of Trade.
The National Commodities bourse accounts for 95 percent of all wheat futures traded in India. Wheat makes up just 1 percent of the bourse's daily turnover of 35 billion rupees, Managing Director P.H. Ravikumar said today.
`Succumb to Demand'
The value of trades on India's 24 commodity bourses reached 27.4 trillion rupees ($619 billion) between April and December, surpassing 21.55 trillion rupees for the year ended March 2006, as economic expansion in China and India, the world's fastest- growing economies, sent metals and energy prices to records.
A surge in turnover has raised the pressure to halt trading in food staples, Agriculture Minister Sharad Pawar said Feb. 21.
``If all constituents demand a ban in futures trading, we will have to succumb to their demand,'' he said.
The Congress party yesterday lost elections in two of the three states that elected deputies to local legislature. Singh's government wants to curb inflation ahead of polls in April in Uttar Pradesh state, India's biggest, which elects a seventh of all federal house deputies.
India's inflation rate has climbed to a two-year high as record economic expansion boosts demand for farm and factory products. Gains in consumer prices paid by farmers are at an eight-year high of 8.94 percent, while price increases for urban dwellers are the most in six years.
`More Measures'
The government has in the past month reduced import duties on cooking oils, steel, aluminum, copper, cement and chemicals such as sulphur, and cut prices of auto-fuels. Last week, the government said it will sell 365,000 tons of wheat at below market prices to cushion consumers from rising food prices.
``We will continue to take more steps'' to curb inflation, Finance Minister Palaniappan Chidambaram said in his annual budget speech in parliament today.
Domestic traders and producing and consuming companies are the main participants in India's commodity exchanges, compared with the 13 million individual investors -- three times the population of Singapore -- who invest in stocks. India opened up its stock markets to overseas investors in 1993.
Overseas funds aren't allowed to trade in India's commodity futures market. Edward Naylor, spokesman for Goldman, declined to comment on today's ban.
`Killing the Messenger'
Not everyone agrees trading in farm commodities has helped accelerate inflation.
``Price is the product of supply, demand and certain other factors, and the futures market only provides a message,'' said S. Sundareshan, chairman of the Forward Markets Commission, in an interview on Feb. 13. ``By killing the messenger you're not going to achieve that.''
Wheat, used in local flat breads such as naan and chapatis, and rice are among staples in a nation of 1.1 billion people. Wheat is also India's biggest winter-sown crop and accounts for one-third of the South Asian nation's total grain production.
Wheat prices on the Chicago Board of Trade reached a 10- year high in October in part because India began importing the grain in February 2006 after a six-year gap to meet a production shortfall. Output this year may exceed 72.5 million tons, Pawar said on Feb. 20.
