Indian regulator banned sugar futures to save sugar futures

When the Indian government implemented a ban on sugar futures last May, BC Khatua let it happen without a fight. 

 That seemed out of character for Khatua, who heads India's Forward Markets Commission (FMC) and has long criticized the 2007 decision to ban futures on three staple food products (rice, tur, which is a type of pea, and urad, which is a type of black bean), so we asked him about this at the 31st annual Burgenstock Meeting here in Interlaken.

 The answer offers a revealing glimpse into the real-world challenges that regulators face – for it turns out that Khatua sacrificed sugar futures in the short term to win a large prize: by letting the ban go through when he did, Khatua may have cleared the way to bring back futures on the tur and urad.  Futures on sugar are set to resume October 1.

 “When they asked me to impose the ban last May, Indian sugar was trading at about 22 rupees per kilogram,” he says.  “We'd just had two bumper crops, but were in the middle of a very bad season.”

 He was already worried about India's own domestic shortfall, which looked to be about the same size as the entire market for World Sugar #11 – the global market comprised of other countries' excess.

 “I could tell we were in for a volatile season,” he says.  “And I knew that futures would get the blame.”

 That's when a group of left-wing senators began calling for a ban, and Khatua willingly obliged – on the condition that the ban has a sunset clause.

 “I figured that if the market went berserk and there was an active futures contract, everyone would blame futures,” he says.  “But if the market went berserk and there were no futures contract, critics might be more open to seeing the real cause.”

 After the ban was implemented, prices doubled to 45 rupees per kilogram before falling down to today's levels – about 25 cents per kilogram.

 The ban is set to expire at the end of September, and Knatua has no intention of renewing it.

 “I've written up an analysis of this whole episode, and have presented it to government,” he says.  “Now I expect to get back at least the tur and maybe urad.”

 A youthful 60 (and looking half that), Khatua had been set to retire in August, but his contract was extended for another year.  In that time, he hopes not only to bring back the tur and urad, but also to disentangle the FMC from the political apparatus.  We suspect he'll achieve both.

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