Inflationary Effect of Agricultural Commodity Futures Market in India: Is it There and Should we Care?

Abstract

The impact of the agricultural commodity futures market on agricultural commodity prices has been a contested issue in India. Regulators have often interfered in this market with the stated objective of controlling inflation. In this article, we examine the relationship between futures trading activity and spot price inflation in the agricultural commodity markets in India by analysing the relationship on the aggregate market level as well as on the individual markets of 12 commodities. We find that the trading volume of AGRIDEX futures contracts has a significant and positive impact on the Consumer Price Index in both the long run and short run. For individual commodities, we find that the futures volume has a significant and positive impact on the spot price in only four out of eleven commodities analysed. The evidence suggests that regulators should monitor the market closely but refrain from repeatedly using stringent measures, like banning trading.