Reforming India’s Futures Market

The need for reforming India’s futures market was felt recently when margins were increased amidst a severe credit crunch. Despite that, the market regulator was blamed for not taking appropriate steps. The article below reveals certain events, which made many sit back and think twice about reforms needed in the country.
Future markets have been known to assist participants of the market in two very important aspects. They are Price Risk Management as well as Price Discovery. The future market is also known to neutralize the effects of intra-seasonal as well as inter seasonal fluctuations in pricing.

Owing to this, a lot of stability is brought about in the commodity prices. Simultaneously, it also helps the farmers to avail of lucrative prices without actually tarnishing the consumer interests. A future market also serves as an alternative to interference of the government. An instance is procurement pertaining to Minimum Support Price as well as a Public Distribution System.

Reforming India’s futures markets-a necessity:
It is a well-known fact that owing to the sub prime crisis in USA, the effects are flowing over in various countries and the global economy has slowed down.
Lately, there has been a lot of hue and cry about the futures market and the market regulator SEBI or Securities and Exchange Board of India was blamed for not taking the appropriate measures at the time of crisis. This made people realize that reforming India’s futures market was the need of the time.
There were undulations in trading activities:
It may be mentioned here that India’s equity futures market is highly liquid. Reports state that the futures market witnessed plenty of money being drained out of the system. The actually scenario was the financial markets were already backsliding because of the ripple effect of US sub prime crisis. As an aftermath, it was observed that amidst “falling market” conditions, the margins in the future markets were hiked to a great extent. This particular action (that of hiking the margins amidst economic slowdown) was greatly criticized. It was stated that the very country, which was reeling under recession, the United States of America, never raised margins in such instances as compared to India’s futures markets. Surprisingly, it was recorded that the margins went up by as much as 100% to 300% on some of the futures.

As per reports, when the margins were flying high, there were instances when the underlying stocks were found to be less expensive than the futures. SEBI was questioned time and again as to why appropriate measures were not taken when it was needed the most especially, when the the stock markets of India comprise 80% of all trading activities.

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Last Updated on : 1st August 2013

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