Role of Commodity Futures Market in Spot Price Stabilization, Production and Inventory Decisions with Reference to India
Indian Economic Review, Vol. 39, No. 2, 2004
Posted: 23 Aug 2005
The findings of this paper suggest that the allegation against futures market in India 'that it distorts the spot market price and creates artificial scarcity by allowing unnecessary hoarding', is a misconception. This paper finds out that there is a co-movement among futures price, production decision and the inventory decision. With the assumption that future market is monopolistically competitive, the paper finds that future price elasticity of production always being greater than or equal to one, an increase in profit by increasing price is not possible. Therefore, the doubt about its distorting effect on spot price can be ruled out. The suspicion about the increasing hoarding resulting from futures market can also be proved unjustified from results. Our results show that futures price elasticity of inventory is inversely related with the carrying cost. Therefore, an unnecessary hoarding will increase the carrying cost leading to a lower responsiveness of inventory to futures prices. This paper also finds out the effect of expected production shocks on futures price elasticity of supply.
Keywords: Commodity futures in India, production shock and futures price, futures
JEL Classification: G130
Suggested Citation: Suggested Citation