After castor & chana, sugar futures may attract government curbs

MUMBAI: Sugar is leaving a bitter taste in the mouths of many in the futures market.

Certain circles within the government, concerned about the impact thin futures trade is having on spot prices of the politically sensitive item and its overall effect on inflation, recently discussed about a possible de-listing of the commodity, a government official aware of the development told ET. “The primary concern is that the price movements on the futures market are impacting the spot prices significantly,” the official said. “Trading volumes on the exchange are thin so the market can be distorted easily. That’s having an impact on the spot market prices.

If ex-mill spot prices rise above Rs 35-37, a trading suspension can’t be ruled out. ” The present ex-mill price in Maharashtra is Rs 33.5 and Rs 35.5 a kilo in UP, the main cane producing states, according to trade body Indian Sugar Mills Association (ISMA).

The retail price in Delhi on August 9 was Rs 42 a kilo, up 45 per cent year-on-year. In Mumbai, the price has risen a steeper 48 per cent to Rs 40 on output concerns. The weightage of sugar in the consumer price index (CPI) is 1.13 per cent. So, in Mumbai, if price rose by 48 per cent y-o-y, the impact on CPI inflation would be 0.54 per cent or over 50 basis points.

“That’s a significant increase since keeping retail inflation within a limit is the stated monetary policy objective,” said Madan Sabnavis, chief economist, Care Ratings. Seized of the issue, NCDEX, the country’s largest farm futures exchange, where sugar is traded, in consultation with market regulator Sebi (Securities and Exchange Board of India), increased significantly the margins a client must put up to trade. From Thursday, those buying a sugar futures contract will have to place a 50 per cent margin to trade, up from 20 per cent earlier.

Those initiating a bearish bet will have to place 15 per cent. That means the leverage a bull can take has been cut to 2 times from 5 times before August 11. Queried on the increase, an NCDEX official said, “these regulatory measures are precautionary in nature to guard against exuberance in the market.” Volumes across three sugar futures contracts were just 13,220 tonnes, intraday Wednesday, according to Bloomberg data.

Against this, nodal trade body Indian Sugar Mills Association (ISMA) pegs the current season’s output at 251 lakh tonnes.

“Since the counter is not very liquid, few traders can cause abnormal price swings. That’s not going down too well with regulatory authorities, which is why margins were raised. It’s possible that if the high margins don’t dissuade speculators, sugar futures could go the chana futures way,” the official cited earlier added. He was referring to how margins on chana were raised successively to 75 per cent before they were suspended in July this year.