REGULATORíS DECISION AND RISK MANAGEMENT: THE CASE OF INDIA

Abstract

Whenever Indian Economy had to tackle signiÖcant ináationary pressure, Secu- rities 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 jus- tiÖed 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 vec- tor error correction model in the backdrop of ináationary and non-ináationary periods. In energy segment, among select commodities, the speed of error correction was 1to 2 days more as compared to non-ináationary 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-ináationary period. Given the underdeveloped nature of agricultural futures market, SEBIís action seems bit too stringent. Although prior studies have been undertaken about Indian spot and derivative markets, empirical studies which have focused on analyzing eco- nomic rationale of SEBIís decision of restricting trade in agricultural futures during ináation are scarce. Our study tries to bridge the gap regarding the same.