REGULATOR’S DECISION AND RISK MANAGEMENT: THE CASE OF INDIA

• Published in: The review of finance and banking Vol. 14; no. 2; pp. 133 - 142
• Main Authors: Kumar, G. K. Chetan, Rangappa, K. B, Suchitra, S
• Format: Journal Article
• Language: English
• Published: EDITURA ASE 2022; ASE Publishing House
• Subjects: Business Economy / Management; Financial Markets; essential commodities; futures; vector error correction model; inflation; suspension; SEBI
• ISSN: 2026-2713; 2067-3825

Whenever Indian Economy had to tackle significant inflationary pressure, Securities Exchange Board of India (SEBI), which is the apex regulator of capital and commodity markets, has time and again resorted to stop the trade in futures of essential agricultural commodities while allowing trade in futures of essential energy commodities. SEBI has justified the step on the grounds that, doing so prevents volatility in agricultural spot market. Our study tries to analyze the nature of correction in the two segments with the help of vector error correction model in the backdrop of inflationary and non-inflationary periods. In energy segment, among select commodities, the speed of error correction was 1 to 2 days more as compared to non-inflationary period. With regards to commercial agricultural segment, the rate of error correction among select commodities was 4 to 7 days more as compared to non-inflationary period. Given the underdeveloped nature of agricultural futures market, SEBI’s action seems bit too stringent. Although prior studies have been undertaken about Indian spot and derivative markets, empirical studies which have focused on analyzing economic rationale of SEBI’s decision of restricting trade in agricultural futures during inflation are scarce. Our study tries to bridge the gap regarding the same.