The study articulates the price discovery mechanism in India's rapidly growing commodity futures market. The paper highlights as to how the futures market influence the spot market and facilitates better price discovery in the spot market. The spot and/or futures market dominates the price discovery, but it appears that a better price discovery occurs when there is a mature futures market for the commodity. Granger Causality Test is used for the study that focuses on the Indian stock and commodity market. A comparison is drawn for price discovery between the grown stock market and the growing commodity market. Impact cost is considered for measuring the liquidity and market efficiency, for Indian gold futures market.

The basic purposes of existence of the futures markets are that they provide the economic agents a place of price discovery and risk management through hedging. The futures market reveals the market with information about future spot prices and thus undertakes the process of price discovery. Hedging is a process where futures contracts are being used in order to control their spot prices. Of course, the dual roles of price discovery and price risk management undertaken by the futures markets, and are not offered by the spot market alone, justifies the cause for the existence of such markets.

Considerable amount of research has been done on global benchmark markets as well as Indian market in examining relationship between futures and the underlying spot prices particularly on the lead-lag relationship between futures and the underlying spot returns. Stoll and Whaley (1990) reported existence of a two-way relationship between futures and returns on the underlying S&P 500. Similar conclusions were drawn from the empirical studies done on FTSE-100 and S&P 500 stock index futures by Wahab and Lashgari (1993) and Hung and Zhang (1995). Tse (1995) reported that futures returns lead spot price returns with respect to Nikkei Stock Index contract. In general, all these studies signify that causality between futures and the spot prices can be one-sided (futures to spot) or both-sided (futures to spot and vice versa), depending on the market scrutinized. Despite the plethora of studies directing towards price discovery, the rapidly expanding commodities and financial futures Indian markets give leeway for continuous and further studies. Further, not much study has been done on fledging commodity market in India. This paper inspects the causal relationship between futures and spot prices in the Indian derivatives market, and for this, a simple Granger Causality test is chosen.

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