Price Discovery in Futures and Spot Commodity Markets in India

National Workshop on Commodity Research, 10th October, 2007, India International Centre, New Delhi.

Pratap Ch. Biswal & Raghavendra BadaskarT. A. Pai Management Institute, Manipal

Background of this Study

• The Indian commodity futures markets recorded a 373% growth during 2005-06

• Still there are quite apprehensions about commodity futures market in India, particularly from politicians

• The Finance Minister P Chidambaram expressed strong conviction about the forwards/futures market and urged all political parties to support Forward Contracts (Regulation) Amendment Bill 2006.

• CPM and JD (U) opposed the bill, the CPM wanted essential commodities to be banned from futures trading.

• JD (U) suggested that the commodities exchange Act should be repealed

Derivation of the Objective

• There has been widespread interest in the relationship between commodity futures market and spot trading

• Objective is to examine the role of commodity futures market in performing the function of price discovery in India.

• The price discovery function depends on whether new information is reflected first on futures or spot prices.

• The significance of price discovery depends upon a close relationship between futures and spot price.

Methodology

• The price linkage between futures market and spot market would be investigated using cointegration (Johansen, 1991) analysis and Error Correction.

• Cointegration analysis measures the extent to which two markets have achieved a long run equilibrium.

• Error Correction dynamics characterize the price discovery process, whereby markets attempt to find equilibrium.

Data

• Exchanges: MCX and NCDEX• Market Base Study: Indices would be used• Data: Spot and Futures• Indices: 4 from MCX and 1 from NCDEX

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