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The Phase I, whereby NCDEX will offer trading in futures of bullion and seven agri-products - soybean, soy oil, mustard seed and its oil; crude palm oil, RBD palmolein and cotton, is expected to attract many counterparts who would be more than willing to absorb the risk.
The institutional segment of the capital market has not yet begun to use derivatives for risk hedging or for position taking in the way that such investors should. First, the development of derivatives has so far been excessively skewed toward derivatives used in the equity rather than debtor forex markets. Second, One the one side India have foreign and privately owned (new generation) domestic banks who run a (interest rate) derivative trading book but do not have the ability to set significant counter party credit limits on a large segment of corporate customers of PSBs. On the other side, are PSBs who have the ability to set significant counter party credit limits, but are unable or unwilling to write IRS' or FRAs with them.
Regulatory conservatism and failure are inhibiting the emergence of more types of derivatives - e.g., currency, interest-rate and credit derivatives as well as long-term tailored as well as traded swaps and swaptions.
Without speculative counter-parties, financial markets would be illiquid, inefficient and ineffective in fulfilling their main purpose as resource mobilizing and allocating mechanisms. In financial markets it is speculators (or, in more neutral parlance, insurers, market-makers and options-writers) who enable efficient price-discovery in real-time and allow for efficient, continuous two-way, 'bid-ask' market-making.
Concluded.
* Contributed by -
Nidhi Sethi,
Batch of 2006,
IMT Ghaziabad.
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