Page 275 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes The Abhijit Sen committee, which was constituted to look into this issue, suggested that
the role of futures trading on spot market around that time was inconclusive.
This actually suggests that futures and spot markets are not related, which defies the
anticipated and fundamental role of commodity futures. Our own analysis based on recent
data (CDE-DSE Working Paper-219) shows that the presence of futures market indeed
reduced the price volatility and ensured smooth transmission of exogenous shocks to spot
markets.

Further, both markets are found to be co-integrated, satisfying the basic fundamental
objective. Many studies have shown that the recent surge in food inflation is largely due
to structural factors, some are policy induced, and not due to the futures market. With this
background, calling for ban on trading of some commodities and advocating CTT defies
logic.
The Exchanges, on their part, need to take up the responsibility for enhancing financial
literacy, help in widening the market and smoothening information flow.

To sum up, with a robust tax infrastructure, any transaction tax (either STT or CTT) that is
intended to contain tax avoidance would end up with adverse consequences. This is more
so in the case of CTT, where markets are still evolving and have a larger role to play than
securities market.
Given current economic conditions, where the confidence in the financial markets are
low, it is important to provide confidence-building measures that broaden the market
base, and encourage savings to be channelled to the real sector through financial markets.

It is also time for bringing in well-regulated instruments, rather than introduce hurdles in
financial sector development. Introduction of CTT would increase costs and constrict the
market.
Questions
1. What is the rational behind the introduction of STT?
2. What is the difference between STT and CTT?

Source: http://www.thehindubusinessline.com/opinion/commodities-transaction-tax-undesirable/
article4432300.ece
13.5 Summary

Any goods that are unbranded and are commonly traded in the market come under
commodities. Commodity markets are quite like equity markets.

The commodity market also has two constituents i.e. spot market and derivative market.
In case of a spot market, the commodities are bought and sold for immediate delivery.
India, a commodity based economy where two-thirds of the one billion population depend
on agricultural commodities, surprisingly has an underdeveloped commodity market.
Unlike the physical market, futures markets trades in commodity are largely used as risk
management (hedging) mechanism on either physical commodity itself or open positions
in commodity stock For instance, a jeweller can hedge his inventory against perceived
short-term downturn in gold prices by going short in the future markets.

After Independence, the Constitution of India adopted by Parliament on 26th January,
1950 placed the subject of “Stock Exchanges and Futures Market” in the Union list and

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