The Forward Markets Commission has finally stopped futures trade in guar complex on commodity exchanges after a series of regulatory measures failed to check the price rise.
Despite the move, spot guarseed prices increased five per cent and guar gum prices 10 per cent.
In Jodhpur, guar gum was quoted at Rs 88,740 a quintal and guarseed at Rs 26,999 a quintal. Prices gained after initially dropping following the news.
The guar complex has been on an upward surge since November. Prices of guar seed futures have been rising continuously since November and have gained in excess of 500 per cent during this period.
Commodity exchanges under directives of FMC, put out circulars stating that the outstanding positions will be closed out at the settlement price of Tuesday effectively ending futures trade in guar complex.
Last week, FMC barred fresh positions in the running contracts of guar seed and guar gum. It allowed only squaring off existing positions in contracts until July. The exchanges under the advice of FMC had not launched August and September contracts.
Although any ban in futures trade hits the turnover of commodity exchanges and brokerages, the impact of the halt in futures trade of guar complex would be muted mainly because volumes in this complex have been quite thin in the last two months.
“One cannot term this a ban. This is a temporary suspension of trade,” said an official of a commodity exchange.
Guar futures, both seed and gum, have been moving up sharply hitting the 4 per cent upper price limits several times during the past few months. Initially, the upward surge was attributed to strong fundamentals.
India’s guar seed production in 2011-12 has been estimated at 12.1 lakh tonnes compared with a record crop of 15 lakh tonnes in the previous year. The country is a leading producer of this commodity, which is mainly used in the making of guar gum, a product used in industrial applications.
With futures trade relentlessly hitting the 4 per cent upper circuit, the regulator was prompted to sit up and take notice of the price surge. FMC used every regulatory tool that it could to control prices of guar. It cut open position limits, raised margins on buy side, stopped the launch of fresh contracts and also sent out a team to Rajasthan to investigate the reason for the price rise. Subsequently, it disallowed some traders from trading as one of the many measures to curb prices.
“Although, the stopping of futures trade in guar would not impact turnover it would dampen sentiment,” said Mr Kishore Narne, Head – Currency and Commodity Research, AnandRathi Commodities.
Also, this episode points to the fact that there is an urgent need for making the Forward Contract (Regulation) Amendment Bill into a law so that the regulator has much more tools to handle a situation like this, Mr Narne said.
Autonomy to FMC is very crucial in dealing with situations such as the sharp and continuous rise in guar prices, brokerage officials said.
The guar complex was one of the most active agricultural commodities traded on national multi-commodity exchanges.
Once a commodity’s future trade is stopped or banned, reintroducing and bringing back volumes may not be easy.
In the past, commodities such as wheat and sugar suffered similar fate. Both these commodities had moderately good volumes before they were banned. After they were reintroduced the volumes have never come to original levels, brokerage officials said.
Exchanges and brokerages are hopeful that FMC may allow either the October or the November guar contract to be launched.
If October contract has to be launched it has to be done on April 10. According to a senior official at a brokerage, FMC should not launch October contract. It should make an assessment of the spot market and possibly launch the November contract.
“The November contract can be launched as late as June so that the FMC is able to make some assessments based on sowing details,” said an exchange official.