How about trading in credit derivatives?

[italkcash]

The Reserve Bank of India has put the introduction of credit derivatives on the back burner. It said in a statement: “In view of certain adverse developments witnessed in different international financial markets, particularly the credit markets...the time is not considered opportune to introduce the credit derivatives in India, for the present.”


Given the large size of the problem in Western financial markets, where central banks have even had to inject liquidity into the system, it’s difficult to disagree with RBI’s stance at this point. And considering that the central bank has traditionally been cautious about derivatives, the decision is hardly surprising.

[italkcash]

The price of refined soya oil has risen by 20% since the ban on 7 May. The price of rubber has also risen, but not as much and that of chana has remained flat. Only the price of potato, futures trading on which was also banned last month, has dropped, but that’s because of a bumper crop this year.

Hopefully, when the ban is reviewed about two months from now, better sense will prevail and it will be lifted. With the transparent price discovery mechanism of the futures market missing, large dealers could form a cartel in some of these commodities and extract higher prices from buyers. If that happens, the ban would only add to inflation.