Literature in finance and economics suggests that, futures price is the best predictor of the spot price, that will prevail in future. The unbiased nature of the market ensures that there is convergence of futures and spot prices on the delivery day, so that there does not exist any arbitrage opportunity. This phenomenon, thus, not only helps the price discovery process but also works as a price and factor distribution stabilization force, over a period. But, as the literature survey suggests, the commodity futures market in India was largely inefficient before liberalization of the same in 2003. Therefore, the question arises as to whether the situation has changed after liberalization. Whether the markets have become more efficient in terms of price forecasting, price discovery and unbiasedness. The study of 12 commodities traded on NCDEX, for the contracts ending in May 2006, using the different test methods showed that only Gur and Gold have achieved market efficiency to recognizable extent. Other commodities, if at all show some relationship between futures and spot prices, then they are doing so with a considerable lag; and in some cases, with a bilateral causality or reverse causality. The study highlights some fundamental reasons for inefficiency and provides suggestions to overcome them.
After
the liberalization of Indian economy in 1991, futures trading
in major commodities, barring some commodities of strategic
importance, were permitted in a gradual way, from April 1,
2003 and today, there are 24 commodity exchanges, operating
and facilitating trade in different commodities' derivatives.
The importance of this market can be gauged from the fact
that for the fortnight from March 1, 2007 to March 15, 2007
the total value of trading in all the commodity exchanges
stood at a commendable Rs. 1,82,114.85 cr. The total value
of trade for the financial year 2006-07 i.e., from April 1,
2006 to March 15, 2007, stood at a massive Rs. 35,08,856.49
cr, which indeed is very impressive.
All
this has happened after commodity markets took more professional
shape due to legislative changes in Indian futures segment
in 2003, after which it has grown substantially on almost
all parameters of evolution and growth. In the light of these
developments, this paper examines one of the most crucial
determinants of a developed commodities' futures market, namely
its efficiency. |
