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EXECUTIVE SUMMARY

Inflation is greatest concern for the developing country like India. Increase or

decrease in Inflation is depended on many factors like demand and supply of the essential

commodity, speculation in commodity exchange, and money supply in the economics.

Inflation is indirect tax that middle class people always have to pay. Inflation is indirect tax

in the sense of burden in the head of common people in term of abnormal price increase.

There are too many arguments that inflation is directly affected by the speculation in the

commodity exchange.

Our report is made up using secondary data i.e. historical data of inflation and

commodity prices. Our main source of data collection is Indian statistical organization and

various commodity exchanges across India. Research is done by finding correlation between

commodity prices and their contribution to inflation.

In many commodities, Commodity price and inflation are positively related and their

correlation is just around 0.99 while in some commodity correlation is less positively related

and correlation is just around 0.35.

Our analysis has certain weakness like uses only one statistical tools and other likes

problems in data collection and last but lot least time span is also three months which is too

low as far as subject of report is concern

Our finding is based on the presumption of that in commodity exchange speculating

activity is being carried out and our analysis suggest based on our above presumption that

commodity exchange directly affect inflation. Commodity exchange is great concern for

government for curbing inflation. Government has to regulate commodity exchanges in a way

that speculation in commodity is reduced.

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1. INTRODUCTION

India, a commodity based economy where two-third of the one billion population

depends on agricultural commodities, surprisingly has an under developed 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 jeweler can hedge his inventory against perceived short-term downturn

in gold prices by going short in the future markets.

The article aims at knowhow of the commodities market and how the commodities

traded on the exchange. The idea is to understand the importance of commodity derivatives

and learn about the market from Indian point of view. In fact it was one of the most vibrant

markets till early 70s. Its development and growth was shunted due to numerous restrictions

earlier. Now, with most of these restrictions being removed, there is tremendous potential for

growth of this market in the country.

1.1 COMMODITY:

A commodity may be defined as an article, a product or material that is bought and

sold. It can be classified as every kind of movable property, except Actionable Claims,

Money & Securities.

Commodities actually offer immense potential to become a separate asset class for

market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to

understand the equity markets, may find commodities an unfathomable market. But

commodities are easy to understand as far as fundamentals of demand and supply are

concerned. Retail investors should understand the risks and advantages of trading in

commodities futures before taking a leap. Historically, pricing in commodities futures has

been less volatile compared with equity and bonds, thus providing an efficient portfolio

diversification option.

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In fact, the size of the commodities markets in India is also quite significant. Of the

country's GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and

dependent) industries constitute about 58 per cent.

Currently, the various commodities across the country clock an annual turnover of Rs

1, 40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the size of the

commodities market grows many folds here on.

1.1.a.  COMMODITY MARKET:

Commodity market is an important constituent of the financial markets of any

country. It is the market where a wide range of products, viz., precious metals, base metals,

crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to

develop a vibrant, active and liquid commodity market. This would help investors hedge their

commodity risk, take speculative positions in commodities and exploit arbitrage opportunities

in the market.

Table: 1

Turnover in Financial Markets and Commodity Market

S No. Market segments 2006-07 2007-08 2008-09

1 Government Securities Market 1,544,376 (63) 2,518,322 (91.2) 2,827,872 (91)

2 Forex Market 658,035 (27) 2,318,531 (84) 3,867,936 (124.4)

3 Total Stock Market Turnover 1,374,405 (56) 3,745,507 (136) 4,160,702 (133.8)

I National Stock Exchange (a+b) 1,057,854 (43) 3,230,002 (117) 3,641,672 (117.1)

  a)Cash 617,989   1,099,534   1,147,027  

  b)Derivatives 439,865   2,130,468   2,494,645  

II Bombay Stock Exchange (a+b) 316,551 (13) 515,505 (18.7) 519,030 (16.7)

  a)Cash 314,073   503,053   499,503  

  b)Derivatives 2,478   12,452   19,527  

4 Commodities Market NA   130,215 (4.7) 500,000 (16.1)

Note: Fig. in bracket represents percentage to GDP at market prices ( Rs. In crore)

Source: Sebi bulletin

1.1.b. EVOLUTION of COMMODITY MARKET IN INDIA:

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Bombay Cotton Trade Association Ltd., set up in 1875, was the first organized futures

market. Bombay Cotton Exchange Ltd. was established in 1893 following the widespread

discontent amongst leading cotton mill owners and merchants over functioning of Bombay

Cotton Trade Association. The Futures trading in oilseeds started in 1900 with the

establishment of the Gujarati Vyapari Mandali, which carried on futures trading in groundnut,

castor seed and cotton. Futures' trading in wheat was existent at several places in Punjab and

Uttar Pradesh. But the most notable futures exchange for wheat was chamber of commerce at

Hapur set up in 1913. Futures trading in bullion began in Mumbai in 1920. Calcutta Hessian

Exchange Ltd. was established in 1919 for futures trading in raw jute and jute goods. But

organized futures trading in raw jute began only in 1927 with the establishment of East

Indian Jute Association Ltd. These two associations amalgamated in 1945 to form the East

India Jute & Hessian Ltd. to conduct organized trading in both Raw Jute and Jute goods.

Forward Contracts (Regulation) Act was enacted in 1952 and the Forwards Markets

Commission (FMC) was established in 1953 under the Ministry of Consumer Affairs and

Public Distribution. In due course, several other exchanges were created in the country to

trade in diverse commodities.

1.1.c.  Structure of Commodity Market:

1.1.d. Types of Commodities Traded:

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World-over one will find that a market exits for almost all the commodities known to us.

These commodities can be broadly classified into the following:

Precious Metals: Gold, Silver, Platinum etc 

Other Metals: Nickel, Aluminum, Copper etc 

Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds. 

Soft Commodities: Coffee, Cocoa, Sugar etc 

Live-Stock: Live Cattle, Pork Bellies etc 

Energy: Crude Oil, Natural Gas, Gasoline etc

1.1.e. Different segments in Commodities market:

The commodities market exits in two distinct forms namely the Over the Counter

(OTC) market and the Exchange based market. Also, as in equities, there exists the spot

and the derivatives segment. The spot markets are essentially over the counter markets and

the participation is restricted to people who are involved with that commodity say the farmer,

processor, wholesaler etc. Derivative trading takes place through exchange-based markets

with standardized contracts, settlements etc.

1.1.f. Leading Commodity Markets of World:

Some of the leading exchanges of the world are New York Mercantile Exchange

(NYMEX), the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT).

1.1.g. Leading Commodity Markets of India:

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The government has now allowed national commodity exchanges, similar to the BSE

& NSE, to come up and let them deal in commodity derivatives in an electronic trading

environment. These exchanges are expected to offer a nation-wide anonymous, order driven,

screen based trading system for trading. The Forward Markets Commission (FMC) will

regulate these exchanges.

Consequently four commodity exchanges have been approved to commence business

in this regard. They are:

Multi Commodity Exchange (MCX) located at Mumbai. 

National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai. 

National Board of Trade (NBOT) located at Indore. 

National Multi Commodity Exchange (NMCE) located at Ahmedabad. 

Turnover on Commodity Futures Markets

    (Rs. In Crores)

Exchange 2003-04 2004-05 FIRST Half

NCDEX 1490 54011

NBOT 53014 51038

MCX 2456 30695

NMCE 23842 7943

ALL EXCHANGES 129364 170720

MCX (Multi Commodity Exchange):

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Multi Commodity Exchange (MCX) is an independent commodity exchange based

in India. It was established in 2003 and is based in Mumbai. The turnover of the exchange for

the fiscal year 2009 was US$ 1.24 trillion, and in terms of contracts traded, it was in 2009 the

world's sixth largest commodity exchange. MCX offers futures trading in bullion, ferrous and

non-ferrous metals, energy, and a number of agricultural commodities (menthe oil,

cardamom, potatoes, palm oil and others).

MCX has also set up in joint venture the MCX Stock Exchange. Earlier spin-offs

from the company include the National Spot Exchange, an electronic spot exchange for

bullion and agricultural commodities, and National Bulk Handling Corporation (NBHC)

India's largest collateral management company which provides bulk storage and handling of

agricultural products.

It is regulated by the Forward Markets Commission.

MCX is India's No. 1 commodity exchange with 83% market share in 2009

The exchange's main competitor is National Commodity & Derivatives Exchange Ltd

Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no. 3 in crude oil and gold in

futures trading

The highest traded item is gold.

MCX has several strategic alliances with leading exchanges across the globe

As of early 2010, the normal daily turnover of MCX was about US$ 6 to 8 billion

MCX now reaches out to about 800 cities and towns in India with the help of about

126,000 trading terminals

MCX COMDEX is India's first and only composite commodity futures price index

Multi Commodity Exchange

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Type Private

Industry Business Services

Founded 2003

Headquarters Exchange Square, Suren Road, Chakala, Andheri (East), Mumbai, India

Key people Lamon Rutten, MD and CEO

Products Futures exchange

Revenue Rs 104.39 crore (2005–2006)

Website www.mcxindia.com

NCDEX(National Commodity and Derivative Exchange):

National Commodity & Derivatives Exchange Limited (NCDEX) is an

online commodity exchange based in India. It was incorporated as a private limited company

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incorporated on 23 April 2003 under the Companies Act, 1956. It obtained its Certificate for

Commencement of Business on 9 May 2003. It has commenced its operations on 15

December 2003. NCDEX is a closely held private company which is promoted by national

level institutions and has an independent Board of Directors and professionals not having

vested interest in commodity markets.

National Commodity & Derivatives Exchange

Type Online commodity exchange

Founded 15 December 2003

Headquarters Mumbai, Maharashtra, India

Website www.ncdex.com

NMCE (National Multi Commodity Exchange):

The Indian experience in commodity futures market dates back to thousands of years.

References to such markets in India appear in Kautialya’s ‘Arthasastra’. The words, “Teji”,

“Mandi”, “Gali”, and “Phatak” have been commonly heard in Indian markets for centuries.

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The first organized futures market was however established in 1875 under the aegis of

the Bombay Cotton Trade Association to trade in cotton contracts. Derivatives trading were

then spread to oilseeds, jute and food grains. The derivatives trading in India however did not

have uninterrupted legal approval. By the Second World War, i.e., between the 1920’s

&1940’s, futures trading in organized form had commenced in a number of commodities

such as – cotton, groundnut, groundnut oil, raw jute, jute goods, castor seed, wheat, rice,

sugar, precious metals like gold and silver. During the Second World War futures trading was

prohibited under Defense of India Rules.

After independence, the subject of futures trading was placed in the Union list, and

Forward Contracts (Regulation) Act, 1952 was enacted. Futures trading in commodities

particularly, cotton, oilseeds and bullion, was at its peak during this period. However

following the scarcity in various commodities, futures trading in most commodities was

prohibited in mid-sixties. There was a time when trading was permitted only two minor

commodities, viz., pepper and turmeric.

Deregulation and liberalization following the forex crisis in early 1990s, also

triggered policy changes leading to re-introduction of futures trading in commodities in India.

The growing realization of imminent globalization under the WTO regime and non-

sustainability of the Government support to commodity sector led the Government to explore

the alternative of market-based mechanism, viz., futures markets, to protect the commodity

sector from price-volatility. In April, 1999 the Government took a landmark decision to

remove all the commodities from the restrictive list. Food-grains, pulses and bullion were not

exceptions.

The long spell of prohibition had stunted growth and modernization of the surviving

traditional commodity exchanges. Therefore, along with liberalization of commodity futures,

the Government initiated steps to cajole and incentives the existing Exchanges to modernize

their systems and structures. Faced with the grudging reluctance to modernize and slow pace

of introduction of fair and transparent structures by the existing Exchanges, Government

allowed setting up of new modern, demutualised Nation-wide Multi-commodity Exchanges

with investment support by public and private institutions. National Multi Commodity

Exchange of India Ltd. (NMCE) was the first such exchange to be granted permanent

recognition by the Government

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NATIONAL BOARD OF TRADE LIMITED (NBOT):  

It was incorporated on July 30, 1999 to offer integrated, state-of-the-art 

commodity futures  exchange. It was incorporated to offer transparent and efficient

trading platform to various market intermediaries in the commodity futures trade. Today

NBOT is one of the fastest growing commodity exchanges recognized by the

Government of India under the aegis of the Forward Markets Commission. Within a

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short span of seven years, NBOT has carved out a niche for itself in the commodities

market. With a humble beginning of trading in February 2000 its average daily volume

has reached a staggering 60,000 MTs (approx.) in terms of Soya oil. It has implemented

the state-of-the-art technology and system for efficient handling of Trading, Margining,

Clearing and Settlement in respect of all the transactions confirmed by the Exchange.

The Board of directors, adorned by a galaxy of the most respectful personalities drawn

from different categories of trade and commerce has been giving necessary impetus and

thrust for setting up of the exchange and provide guidance for its proper functioning.

  NBOT has been constantly endeavoring to strengthen professionalism in the

commodities futures market and to provide credible nation-wide trading facilities to

market players in tune with the international standards.

MISSION

To achieve high distinction in integrity for pricing, risk management and investment

to build an internationally acclaimed innovative Commodity Exchange in India.

OBJECT

       Futures Exchange helps to achieve dual economic purpose: Price Discovery &

Risk-Management.

COMMODITIES AND VOLUME

       NBOT has been mandated to organize futures trading in the following

commodities: 

       (i) Soybean, its oil and cake; 

       (ii) Rape/Mustard seed, their oil and cake; 

       (iii) RBD Palmolein, Crude Palm Oil, CPO Refined and Crude Palmolein 

The volume of trade of the Exchange since inception is as follows: 

Financial Years Volume(in MT) Value(Rs. in lakh)

2000-01 1744860 422899.77

2001-02 2527235 724673.11

2002-03 9106500 3437638.20

2003-04 13154449 5301386.50

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2004-05 14091715 5846284.00

2005-06 14549785 5341342.80

2006-07 17383567 7526280.35

2007-08 17950495 9509034.71

1.2. Inflation

1.2.a. History:

Increases in the quantity of money or in the overall money supply (or debasement of

the means of exchange) have occurred in many different societies throughout history,

changing with different forms of money used. For instance, when gold was used as currency,

the government could collect gold coins, melt them down, mix them with other metals such

as silver, copper or lead, and reissue them at the same nominal value. By diluting the gold

with other metals, the government could issue more coins without also needing to increase

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the amount of gold used to make them. When the cost of each coin is lowered in this way, the

government profits from an increase in seignior age. This practice would increase the money

supply but at the same time the relative value of each coin would be lowered. As the relative

value of the coins becomes less, consumers would need to give more coins in exchange for

the same goods and services as before.

Historically, infusions of gold or silver into an economy have also led to inflation.

From the second half of the 15th century to the first half of the 17th, Western

Europe experienced a major inflationary cycle referred to as the "price revolution", with

prices on average rising perhaps six fold over 150 years. This was largely caused by the

sudden influx of gold and silver from the New World into Habsburg Spain. The silver spread

throughout a previously cash starved Europe, and caused widespread inflation. Demographic

factors also contributed to upward pressure on prices, with European population growth after

depopulation caused by the Black Death pandemic.

By the nineteenth century, economists categorized three separate factors that cause a

rise or fall in the price of goods: a change in the value or resource costs of the good, a change

in the price of money which then was usually a fluctuation in the commodity price of the

metallic content in the currency, and currency depreciation resulting from an increased

supply of currency relative to the quantity of redeemable metal backing the currency.

Following the proliferation of private bank note currency printed during the American Civil

War, the term "inflation" started to appear as a direct reference to the currency

depreciation that occurred as the quantity of redeemable bank notes outstripped the quantity

of metal available for their redemption. The term inflation then referred to the devaluation of

the currency, and not to a rise in the price of goods.

This relationship between the over-supply of bank notes and a

resulting depreciation in their value was noted by earlier classical economists such as David

Hume and David Ricardo, who would go on to examine and debate to what effect a currency

devaluation (later termed monetary inflation) has on the price of goods (later termed price

inflation, and eventually just inflation).

The adoption of fiat currency (paper money) by many countries, from the 18th

century onwards, made much larger variations in the supply of money possible. Since then,

huge increases in the supply of paper money have taken place in a number of countries,

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producing hyperinflations-- episodes of extreme inflation rates much higher than those

observed in earlier periods of commodity money. The hyperinflation suffered by the Weimar

Republic of Germany is a notable example.

1.2.b. Measuring Inflation:

Inflation is usually estimated by calculating the inflation rate of a price index, usually

the Consumer Price Index. The Consumer Price Index measures prices of a selection of goods

and services purchased by a "typical consumer". The inflation rate is the percentage rate of

change of a price index over time.

For instance, in January 2007, the U.S. Consumer Price Index was 202.416, and in

January 2008 it was 211.080. The formula for calculating the annual percentage rate inflation

in the CPI over the course of 2007 is

The resulting inflation rate for the CPI in this one year period is 4.28%, meaning the

general level of prices for typical U.S. consumers rose by approximately four percent in

2007.

Other widely used price indices for calculating price inflation include the following:

Producer price indices (PPIs) which measures average changes in prices received by

domestic producers for their output. This differs from the CPI in that price

subsidization, profits, and taxes may cause the amount received by the producer to

differ from what the consumer paid. There is also typically a delay between an

increase in the PPI and any eventual increase in the CPI. Producer price index

measures the pressure being put on producers by the costs of their raw materials.

This could be "passed on" to consumers, or it could be absorbed by profits, or offset

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by increasing productivity. In India and the United States, an earlier version of the

PPI was called the Wholesale Price Index.

Commodity price indices, which measure the price of a selection of commodities. In

the present commodity price indices are weighted by the relative importance of the

components to the "all in" cost of an employee.

Core price indices: because food and oil prices can change quickly due to changes in

supply and demand conditions in the food and oil markets, it can be difficult to

detect the long run trend in price levels when those prices are included. Therefore

most statistical agencies also report a measure of 'core inflation', which removes the

most volatile components (such as food and oil) from a broad price index like the

CPI. Because core inflation is less affected by short run supply and demand

conditions in specific markets, central banks rely on it to better measure the

inflationary impact of current monetary policy.

Other common measures of inflation are:

GDP deflator is a measure of the price of all the goods and services included in Gross

Domestic Product (GDP). The US Commerce Department publishes a deflator series

for US GDP, defined as its nominal GDP measure divided by its real GDP measure.

Regional inflation The Bureau of Labor Statistics breaks down CPI-U calculations

down to different regions of the US.

Historical inflation Before collecting consistent econometric data became standard for

governments, and for the purpose of comparing absolute, rather than relative

standards of living, various economists have calculated imputed inflation figures.

1.2.c. New Inflation Calculation Process:

Overhauling the dynamics of calculating inflation (or Wholesale Price Index) – It is

yet another reformist movement in India; though not a big reform, but nonetheless an

important change to keep pace with current times.

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The Commerce Ministry has released a new series of annual rate of inflation, based on

monthly Wholesale Price Index (WPI) , which stood at 8.51% for the month of August, 2010,

as compared to 9.78% for the previous month. The figure as per the old base year came in it

at around 9.5%, just in case you need a better understanding of the comparative parameters.

The base year against which the price rise is measured has been advanced by a decade

from 1993-94 to 2004-05. Moreover, the new WPI index will be more accurate and indicative

about the actual price movement, than the previous one – in a bid to produce more relevant

indicators of inflation based on modern consumption.

(Source : Business Line)

The new series would comprise of different weight-age levels, relative to the

changes in the economy over a period of time. For instance, the weight of manufactured

products would surge from 63.74% as per 1993-94 base price levels to 64.97% now. On the

other hand, the weight of primary articles in the new index would come down to 20.11% as

against 22.02 earlier. As such, the food prices would still comprise a big fifth of a in the WPI

index.

The new WPI series now measures a total of 676 items,  an improvement by 241 items

from the previous list comprising of 435 items only. The basket of manufactured products has

surged from earlier 318 items to 555 items now. The list under primary article group has gone

up from 98 to 102.

The Department of Industrial Policy and Promotion has also said that it would tinker

with the Services Price Index by the end of 2010-11 – for services such as banking and

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finance and trade and transport. Other services which could be taken up at a later date could

include ports, aviation, telecom and post and telegraphy among others.

Interestingly, the new WPI index now also includes the more commonly used items

such as refrigerator, washing machine, microwave oven, computer and Television sets –

which have now turned into basic needs, from wants. In fact, even Consumer items widely

used by middle class such ice-cream, mineral water, readymade and instant food products,

canned meat, leather products, dish antenna and even precious metals like gold and silver

finds its place in the new index

1.2.d. WPI VS CPI

Now as we have seen how inflation is calculated with WPI , its now time to analyze

whether WPI is a good measure of inflation or not.

Most of the major economies like US, UK, Japan, France, Singapore and even our arch

rival China have selected CPI as its official barometer to weigh its inflation. But our country,

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India, is amongst few countries of the world, which selected WPI as its official scale to

measure the inflation in the economy.

The main difference between WPI and CPI is that wholesale price index measures

inflation at each stage of production while consumer price index measures inflation only at

final stage of production.

In last post we discussed about WPI, now let’s have a better understanding of CPI and

how it’s better from WPI:

CPI is a statistical time-series measure of a weighted average of prices of a specified set

of goods and services purchased by consumers. It is a price index that tracks the prices of a

specified basket of consumer goods and services, providing a measure of inflation.

CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI,

an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of

the index are a percentage relative to this one.

Problems in Using WPI:

Economists say that main problem with WPI is that more than 100 out of 435

commodities included in the index have abstained to be important from consumption point of

view. Take, for example, a commodity like coarse grains that go into making of livestock

feed. This commodity is insignificant, but continues to be considered while measuring

inflation.

WPI measures general level of price changes either at level of wholesaler or at the

producer and does not take into account the retail margins. Therefore we see here that WPI

does give the true picture of inflation.

In present day service sector plays a key role in Indian economy. Consumers are

spending loads of money on services like education and health. And these services are not

incorporated in calculation of WPI.

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Moreover the inflation figure that we get on Friday hardly makes a difference to

consumers, as the commodities on which inflation is calculated are not part individual

consumer budget. Therefore in order to know what exact number of inflation is affecting your

budget, it is advisable you should do your own calculation. You can compare your

expenditure for previous years and with present scenario required to maintain your lifestyle

and you ill come to know that increase in expenditure would be a few times higher than the

official inflation figure.

But it is not easy for country like India to adopt to CPI , as in India, there are four

different types of CPI indices, and that makes switching over to the Index from WPI fairly

'risky and unwieldy’.

The four CPI series are:

CPI Industrial Workers;

CPI Urban Non-Manual Employees;

CPI Agricultural laborers; and

CPI Rural labor.

Apart from this official statements say that there is too much of lag in reporting of

CPI numbers, which makes it difficult for India to calculate inflation based on CPI figures.

India calculates inflation on weekly basis, whereas CPI figures are available on monthly

basis. So all this give little ground for Indian government to adopt CPI in calculating

inflation.

1.2.e. Effect of Inflation

General

An increase in the general level of prices implies a decrease in the purchasing power of

the currency. That is, when the general level of prices rises, each monetary unit buys fewer

goods and services. The effect of inflation is not distributed evenly in the economy, and as a

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consequence there are hidden costs to some and benefits to others from this decrease in the

purchasing power of money. For example, with inflation, lenders or depositors who are paid a

fixed rate of interest on loans or deposits will lose purchasing power from their interest

earnings, while their borrowers benefit. Individuals or institutions with cash assets will

experience a decline in the purchasing power of their holdings. Increases in payments to

workers and pensioners often lag behind inflation, especially for those with fixed payments.

Increases in the price level (inflation) erode the real value of money (the functional

currency) and other items with an underlying monetary nature (e.g. loans and bonds).

However, inflation has no effect on the real value of non-monetary items, (e.g. goods and

commodities, gold, real estate).

Debtors who have debts with a fixed nominal rate of interest will see a reduction in the

"real" interest rate as the inflation rate rises. The “real” interest on a loan is the nominal rate

minus the inflation rate (approximately [31] ). For example if you take a loan where the stated

interest rate is 6% and the inflation rate is at 3%, the real interest rate that you are paying for

the loan is 3%. It would also hold true that if you had a loan at a fixed interest rate of 6% and

the inflation rate jumped to 20% you would have a real interest rate of -14%. Banks and other

lenders adjust for this inflation risk either by including an inflation premium in the costs of

lending the money by creating a higher initial stated interest rate or by setting the interest at a

variable rate. As the rate of inflation decreases, this has the opposite (negative) effect on

borrowers.

Negative

High or unpredictable inflation rates are regarded as harmful to an overall economy. They

add inefficiencies in the market, and make it difficult for companies to budget or plan long-

term. Inflation can act as a drag on productivity as companies are forced to shift resources

away from products and services in order to focus on profit and losses from currency

inflation. Uncertainty about the future purchasing power of money discourages investment

and saving. And inflation can impose hidden tax increases, as inflated earnings push

taxpayers into higher income tax rates unless the tax brackets are indexed to inflation.

With high inflation, purchasing power is redistributed from those on fixed nominal

incomes, such as some pensioners whose pensions are not indexed to the price level, towards

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those with variable incomes whose earnings may better keep pace with the inflation.  This

redistribution of purchasing power will also occur between international trading partners.

Where fixed exchange rates are imposed, higher inflation in one economy than another will

cause the first economy's exports to become more expensive and affect the balance of trade.

There can also be negative impacts to trade from an increased instability in currency

exchange prices caused by unpredictable inflation.

Cost-push inflation

High inflation can prompt employees to demand rapid wage increases, to keep

up with consumer prices. In the cost-push theory of inflation, rising wages in turn can

help fuel inflation. In the case of collective bargaining, wage growth will be set as a

function of inflationary expectations, which will be higher when inflation is high. This

can cause a wage spiral. In a sense, inflation begets further inflationary expectations,

which beget further inflation

.

Hoarding

People buy durable and/or non-perishable commodities and other goods as

stores of wealth, to avoid the losses expected from the declining purchasing power of

money, creating shortages of the hoarded goods.

Social unrest and revolts

Inflation can lead to massive demonstrations and revolutions. For example,

inflation and in particular food inflation is considered as one of the main reasons that

caused 2010–2011 Tunisian revolution and Egyptian Revolution of 2011, according

to many observers including Robert Zoellick, president of the World Bank. Tunisian

president Zine El Abidine Ben Ali was ousted, Egyptian President Hosni

Mubarak was also ousted after only 18 days of demonstrations, and protests soon

spread in many countries of North Africa and Middle East.

Hyperinflation

If inflation gets totally out of control (in the upward direction), it can grossly

interfere with the normal workings of the economy, hurting its ability to supply

23

goods. Hyperinflation can lead to the abandonment of the use of the country's

currency, leading to the inefficiencies of barter.

A locative efficiency

A change in the supply or demand for a good will normally cause its relative

price to change, signaling to buyers and sellers that they should re-allocate resources

in response to the new market conditions. But when prices are constantly changing

due to inflation, price changes due to genuine relative price signals are difficult to

distinguish from price changes due to general inflation, so agents are slow to respond

to them. The result is a loss of allocative efficiency.

Shoe leather cost

High inflation increases the opportunity cost of holding cash balances and can

induce people to hold a greater portion of their assets in interest paying accounts.

However, since cash is still needed in order to carry out transactions this means that

more "trips to the bank" are necessary in order to make withdrawals, proverbially

wearing out the "shoe leather" with each trip.

Menu costs

With high inflation, firms must change their prices often in order to keep up

with economy-wide changes. But often changing prices is itself a costly activity

whether explicitly, as with the need to print new menus, or implicitly.

Business cycles

According to the Austrian Business Cycle Theory, inflation sets off the

business cycle. Austrian economists hold this to be the most damaging effect of

inflation. According to Austrian theory, artificially low interest rates and the

associated increase in the money supply lead to reckless, speculative borrowing,

resulting in clusters of mall investments, which eventually have to be liquidated as

they become unsustainable.

Positive:

Labor-market adjustments

24

Keynesians believe that nominal wages are slow to adjust downwards. This

can lead to prolonged disequilibrium and high unemployment in the labor market.

Since inflation would lower the real wage if nominal wages are kept constant,

Keynesians argue that some inflation is good for the economy, as it would allow labor

markets to reach equilibrium faster.

Room to maneuver

The primary tools for controlling the money supply are the ability to set the

discount rate, the rate at which banks can borrow from the central bank, and open

market operations which are the central bank's interventions into the bonds market

with the aim of affecting the nominal interest rate. If an economy finds itself in a

recession with already low, or even zero, nominal interest rates, then the bank cannot

cut these rates further in order to stimulate the economy - this situation is known as

a liquidity trap. A moderate level of inflation tends to ensure that nominal interest

rates stay sufficiently above zero so that if the need arises the bank can cut the

nominal interest rate.

Mundell-Tobin effect

The Nobel laureate Robert Mundell noted that moderate inflation would

induce savers to substitute lending for some money holding as a means to finance

future spending. That substitution would cause market clearing real interest rates to

fall. The lower real rate of interest would induce more borrowing to finance

investment. In a similar vein, Nobel laureate James Tobin noted that such inflation

would cause businesses to substitute investment in physical capital (plant, equipment,

and inventories) for money balances in their asset portfolios. That substitution would

mean choosing the making of investments with lower rates of real return. (The rates

of return are lower because the investments with higher rates of return were already

being made before. The two related effects are known as the Mundell-Tobin effect.

Unless the economy is already overinvesting according to models of economic growth

theory, that extra investment resulting from the effect would be seen as positive.

Instability with Deflation

25

Economist S.C. Tsaing noted that once substantial deflation is expected, two

important effects will appear; both a result of money holding substituting for lending

as a vehicle for saving.  The first was that continually falling prices and the resulting

incentive to hoard money will cause instability resulting from the likely increasing

fear, while money hoards grow in value, that the value of those hoards are at risk, as

people realize that a movement to trade those money hoards for real goods and assets

will quickly drive those prices up. Any movement to spend those hoards "once started

would become a tremendous avalanche, which could rampage for a long time before it

would spend itself."  Thus, a regime of long-term deflation is likely to be interrupted

by periodic spikes of rapid inflation and consequent real economic disruptions.

Moderate and stable inflation would avoid such a seesawing of price movements.

Financial Market Inefficiency with Deflation

The second effect noted by Tsaing is that when savers have substituted money

holding for lending on financial markets, the role of those markets in channeling

savings into investment is undermined. With nominal interest rates driven to zero, or

near zero, from the competition with a high return money asset, there would be no

price mechanism in whatever is left of those markets. With financial markets

effectively euthanized, the remaining goods and physical asset prices would move in

perverse directions. For example, an increased desire to save could not push interest

rates further down (and thereby stimulate investment) but would instead cause

additional money hoarding, driving consumer prices further down and making

investment in consumer goods production thereby less attractive. Moderate inflation,

once its expectation is incorporated into nominal interest rates, would give those

interest rates room to go both up and down in response to shifting investment

opportunities, or savers' preferences, and thus allow financial markets to function in a

more normal fashion.

 1.2.f. Controlling Inflation:

Monetary policy

26

Today the primary tool for controlling inflation is monetary policy. Most central

banks are tasked with keeping the federal funds lending rate at a low level, normally to a

target rate around 2% to 3% per annum, and within a targeted low inflation range, somewhere

from about 2% to 6% per annum. A low positive inflation is usually targeted, as deflationary

conditions are seen as dangerous for the health of the economy.

There are a number of methods that have been suggested to control inflation. Central

banks such as the U.S. Federal Reserve can affect inflation to a significant extent through

setting interest rates and through other operations. High interest rates and slow growth of the

money supply are the traditional ways through which central banks fight or prevent inflation,

though they have different approaches. For instance, some follow a symmetrical inflation

target while others only control inflation when it rises above a target, whether express or

implied.

Monetarists emphasize keeping the growth rate of money steady, and using monetary

policy to control inflation (increasing interest rates, slowing the rise in the money supply).

Keynesians emphasize reducing aggregate demand during economic expansions and

increasing demand during recessions to keep inflation stable. Control of aggregate demand

27

can be achieved using both monetary policy and fiscal policy(increased taxation or reduced

government spending to reduce demand).

Fixed exchange rates

Under a fixed exchange rate currency regime, a country's currency is tied in value to

another single currency or to a basket of other currencies (or sometimes to another measure

of value, such as gold). A fixed exchange rate is usually used to stabilize the value of a

currency, vis-a-vis the currency it is pegged to. It can also be used as a means to control

inflation. However, as the value of the reference currency rises and falls, so does the currency

pegged to it. This essentially means that the inflation rate in the fixed exchange rate country

is determined by the inflation rate of the country the currency is pegged to. In addition, a

fixed exchange rate prevents a government from using domestic monetary policy in order to

achieve macroeconomic stability.

Under the Bretton Woods agreement, most countries around the world had currencies

that were fixed to the US dollar. This limited inflation in those countries, but also exposed

them to the danger of speculative attacks. After the Bretton Woods agreement broke down in

the early 1970s, countries gradually turned to floating exchange rates. However, in the later

part of the 20th century, some countries reverted to a fixed exchange rate as part of an

attempt to control inflation. This policy of using a fixed exchange rate to control inflation was

used in many countries in South America in the later part of the 20th century (e.g.  Argentina

(1991-2002), Bolivia, Brazil, and Chile).

Gold Standard

28

The gold standard is a monetary system in which a region's common media of

exchange are paper notes that are normally freely convertible into pre-set, fixed quantities

of gold. The standard specifies how the gold backing would be implemented, including the

amount of specie per currency unit. The currency itself has no innate value, but is accepted by

traders because it can be redeemed for the equivalent specie. A U.S. silver certificate, for

example, could be redeemed for an actual piece of silver.

The gold standard was partially abandoned via the international adoption of

the Bretton Woods System. Under this system all other major currencies were tied at fixed

rates to the dollar, which itself was tied to gold at the rate of $35 per ounce. The Bretton

Woods system broke down in 1971, causing most countries to switch to fiat money – money

backed only by the laws of the country.

Economies based on the gold standard rarely experience inflation above 2 percent

annually. Under a gold standard, the long term rate of inflation (or deflation) would be

determined by the growth rate of the supply of gold relative to total output. Critics argue that

this will cause arbitrary fluctuations in the inflation rate, and that monetary policy would

essentially be determined by gold mining, which some believe contributed to the Great

Depression.

29

Wage and price controls

Another method attempted in the past have been wage and price controls ("incomes

policies"). Wage and price controls have been successful in wartime environments in

combination with rationing. However, their use in other contexts is far more mixed. Notable

failures of their use include the 1972 imposition of wage and price controls by Richard

Nixon. More successful examples include the Prices and Incomes Accord in Australia and

the Wassenaar Agreement in the Netherlands.

In general wage and price controls are regarded as a temporary and exceptional measure, only

effective when coupled with policies designed to reduce the underlying causes of inflation

during the wage and price control regime, for example, winning the war being fought. They

often have perverse effects, due to the distorted signals they send to the market. Artificially

low prices often cause rationing and shortages and discourage future investment, resulting in

yet further shortages. The usual economic analysis is that any product or service that is under-

priced is over consumed. For example, if the official price of bread is too low, there will be

too little bread at official prices, and too little investment in bread making by the market to

satisfy future needs, thereby exacerbating the problem in the long term.

Temporary controls may complement a recession as a way to fight inflation: the controls

make the recession more efficient as a way to fight inflation (reducing the need to

increase unemployment), while the recession prevents the kinds of distortions that controls

cause when demand is high. However, in general the advice of economists is not to impose

price controls but to liberalize prices by assuming that the economy will adjust and abandon

unprofitable economic activity. The lower activity will place fewer demands on whatever

commodities were driving inflation, whether labor or resources, and inflation will fall with

total economic output. This often produces a severe recession, as productive capacity is

reallocated and is thus often very unpopular with the people whose livelihoods are destroyed

(see creative destruction).

1.2.g.  Adapting to inflation:

 Cost-of-living allowance

30

The real purchasing-power of fixed payments is eroded by inflation unless they are inflation-

adjusted to keep their real values constant. In many countries, employment contracts, pension

benefits, and government entitlements (such as social security) are tied to a cost-of-living

index, typically to the consumer price index.[59] A cost-of-living allowance (COLA) adjusts

salaries based on changes in a cost-of-living index. Salaries are typically adjusted annually in

low inflation economies. During hyperinflation they are adjusted more often. [59] They may

also be tied to a cost-of-living index that varies by geographic location if the employee

moves.

Annual escalation clauses in employment contracts can specify retroactive or future

percentage increases in worker pay which are not tied to any index. These negotiated

increases in pay are colloquially referred to as cost-of-living adjustments or cost-of-living

increases because of their similarity to increases tied to externally determined indexes. Many

economists and compensation analysts consider the idea of predetermined future "cost of

living increases" to be misleading for two reasons: (1) For most recent periods in the

industrialized world, average wages have increased faster than most calculated cost-of-living

indexes, reflecting the influence of rising productivity and worker bargaining power rather

than simply living costs, and (2) most cost-of-living indexes are not forward-looking, but

instead compare current or historical data.

2. Problem Statement and Objective of study

Problem Statement:

31

To validate the argument, commodity exchange directly affects the inflation.

To find out the correlation between inflation and price of commodity in commodity

exchange

Purpose of Study:

Primary objective is to check whether inflation is affected by the speculation in the

commodity exchange

To provide guidance to speculator or investor

To provide guidance to the regulator of exchange and other government body.

To gain knowledge about inflation and commodity exchange

To find out which commodity highly respond to the inflation

3. Data Collection Method

Secondary Data collection Method:

32

Data used in conducting research is past historical data of various commodity

prices and historical data of inflation. Data collected is from secondary sources

like websites of MCXINDIA, ICEX, NMCDX, NCDX and various government

websites like Indian statistical organization and Reserve Bank of India.

4. Limitation of Study:

Time period is only 4 month

33

Only secondary data used

Only selected commodity used rather than all commodity that comprises in inflation

basket.

Inconsistency of the data because in some commodity historical spot rate is used

while in other historical future rate of commodity used

Few statistical model are used

5. ANALYSIS

Commodity: Sugar

34

Year Inflation-XSugar price

Trend in Sugar Price-Y XY X2 Y2

2004 97.70 1650.10 100.00 9770.00 9545.29 10000.002005 107.90 1837.68 111.37 12016.59 11642.41 12402.792006 112.90 1934.30 117.22 13234.50 12746.41 13741.282007 94.90 1498.60 90.82 8618.70 9006.01 8248.042008 101.00 1735.30 105.16 10621.50 10201.00 11059.322009 149.20 2708.92 164.17 24493.72 22260.64 26950.812010 170.40 3087.50 187.11 31883.52 29036.16 35010.10

Total 834.00 14452.40 875.85 110638.52 104437.92 117412.35

r = 0.9979

Where,

n = No. of years

Σxy= Summation of Product of X And Y

Σy= Summation of prices of Commodity

Σx= Summation of Inflation

Σx2= Summation of square of inflation

Σy2= Summation of square of commodity price

2 222

n xy x yr

n x x n y y

35

2004 2005 2006 2007 2008 2009 20100.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

200.00

Relationship Between Sugar Price in Commodity Exchange and inflation

Inflation-X

Trend in Sugar Price-Y

Year

Per

cen

tage

From the above diagram, we can say that inflation and sugar price are going in

hand in hand from 2004 to 2010. Percentage increase in inflation is 70% while increase in

price is 87% from 2004 to 2010. Correlation between these is 0.9979.It shows that Inflation

and price of sugar in commodity exchange are positively correlated. So speculation in

commodity directly affects inflation.

Commodity: Gold

Year Inflation-X Price of GoldTrend in Gold

price-Y XY X2 Y2

2004 100.44 6116.11 100.00 10044.44 10089.09 10000.002005 102.27 6385.17 104.40 10676.56 10458.47 10899.192006 142.84 8904.17 145.59 20795.68 20403.74 21195.14

36

2007 150.07 9277.17 151.68 22762.74 22520.00 23008.082008 188.08 12072.67 197.39 37124.37 35372.21 38963.332009 228.30 15495.30 253.35 57840.31 52120.89 64187.342010 275.78 18547.00 303.25 83628.30 76051.85 91959.54Total 1187.77 76797.59 1255.66 242872.40 227016.25 260212.63

2004 2005 2006 2007 2008 2009 20100.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

Relationship Between Gold Price in Commodity Exchange and inflation

Inflation-X

Trend in Gold price-Y

Year

per

cen

tage

From the above diagram, we can say that inflation and gold price are going in

hand in hand from 2004 to 2010. Percentage increase in inflation is 175% while increase in

price is 200% from 2004 to 2010. Correlation between these is 0.9987.It shows that Inflation

and price of gold in commodity exchange are positively correlated. So speculation in

commodity directly affects inflation.

Commodity: Silver

Year Inflation-X Silver priceTrend in Silver Price-Y XY X2 Y2

2004 100.3 10446.33 100.00 10034.44 10069.01 10000.00

37

2005 101.0 10793.58 103.32 10436.60 10202.6810675.876

7

2006 155.1 17335.08 165.94 25743.48 24066.3527537.481

5

2007 171.8 18573.83 177.80 30552.39 29526.6931613.708

9

2008 192.9 21386.50 204.73 39488.50 37203.9841913.309

1

2009 202.0 23894.00 228.73 46213.20 40820.8452317.891

9

2010 283.8 32365.00 309.82 87919.66 80528.2595989.502

4

Total 1207.0   1290.35 250388.27232417.8

0270047.77

1

2004 2005 2006 2007 2008 2009 20100.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

Relationship Between Silver Price in Commod-ity Exchange and inflation

Inflation

Trend in Silver Price

Year

Per

cent

age

In the above diagram, we can say that inflation and silver price are going in hand in

hand from 2004 to 2010. Both shows increasing trend during these period. Percentage

increase in inflation is 183% while increase in price is 209% from 2004 to 2010. Correlation

between these is 0.9975.It shows that Inflation and price of silver in commodity exchange are

positively correlated. So speculation in commodity directly affects inflation.

Commodity: Raw Cotton

38

YearInflation-

X

Price of Raw

CottonTrend in price of

Raw Cotton-Y XY X2 Y2

2004 105.6 349 100.00 10555.56 11141.98 10000.002005 87.4 340 97.42 8514.61 7638.76 9490.890882006 96.2 364 104.30 10029.12 9246.43 10878.07162007 106.3 426 122.06 12978.35 11305.01 14899.38512008 138.0 485 138.97 19176.49 19041.70 19312.23882009 134.2 613 175.64 23575.91 18016.35 30851.06032010 163.7 667 191.12 31279.56 26786.78 36525.8906Total 831.3 929.51 116109.61 103176.99 131957.537

2004 2005 2006 2007 2008 2009 20100.0

50.0

100.0

150.0

200.0

250.0

Relationship Between Raw Cotton Price in Commodity Exchange and Inflation

Inflation

Trend in price of Raw Cot-ton

Year

Per

cen

tage

In the above diagram, we can say that inflation and raw cotton price are showing

increasing trend but after 2008 inflation is reducing while price of raw cotton is continuously

increasing. Percentage increase in inflation is 63% while increase in price is 91% from 2004

to 2010. Correlation between these is 0.9290. It shows that Inflation and price of raw cotton

in commodity exchange are positively correlated. So speculation in commodity directly

affects inflation.

Commodity: Wheat

39

Year Inflation-X Wheat

Trend in Wheat Price-

Y XY X2 Y2

2004 100.0 7.81 100.00 9997.78 9995.56 10000.002005 100.8 7.74 99.10 9993.78 10169.04 9821.552006 121.3 9.43 120.74 14641.05 14703.58 14578.782007 132.8 10.7 137.00 18199.82 17646.91 18770.052008 144.5 11.5 147.25 21272.30 20870.62 21681.712009 159.8 12.27 157.11 25097.73 25520.06 24682.382010 171.9 12.45 159.41 27408.07 29561.07 25411.87Total 931.1 920.61 126610.53 128466.84 124946.35

2004 2005 2006 2007 2008 2009 20100.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

Relationship Between Wheat Price in Commodity Exchange and Inflation

Inflation-X

Trend in Wheat Price-Y

Year

Per

cen

tage

In the above diagram, we can say that inflation and wheat price are showing

increasing trend till 2006 but after that it is slightly volatile. Percentage increase in inflation is

71% while increase in price is 59% from 2004 to 2010. Correlation between these is 0.9831.

It shows that Inflation and price of wheat in commodity exchange are positively correlated.

So speculation in commodity directly affects inflation.

Commodity: Aluminum

Year Inflation Aluminum Trend of XY X2 Y2

40

Aluminum Price

2005 105.1 97.45 100 10508.3333 11042.51 10000.002006 122.2 124.95 128.2 15665.2296 14926.73 16440.26582007 124.8 114.98 118.0 14729.9075 15585.44 13921.33622008 128.7 109.23 112.1 14422.0215 16555.11 12563.77592009 120.4 88.7 91.0 10961.9668 14504.19 8284.829072010 125.7 99.3821 102.0 12820.9198 15804.68 10400.4625Total 726.9 651.3 79108.3786 88418.66 71610.6694

2005 2006 2007 2008 2009 20100.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Relationship Between Aluminum Price in Commodity Exchange and Inflation

Inflation

Trend of Aluminium Price

Year

Perc

enta

ge

Above diagram shows that inflation is increase till 2008 but in 2009 it decline and in

2010 it slightly increase. While the aluminum price are showing declining trend during 2006

to 2009 but in 2010 it increasing. Percentage increase in inflation is 25% while increase in

price of aluminum is 2% from 2004 to 2010. Correlation between these is 0.3564. It shows

that Inflation and price of aluminum in commodity exchange are less positively correlated. So

speculation in commodity is not directly affected to inflation.

Commodity: Crude Oil

41

Year InflationCrude Price

Trend of Crude Price XY X2 Y2

2004 98.3 37.41 100 9827.78 9658.52 10000.002005 112.8 50.04 133.76 15082.67 12714.44 17892.012006 126.7 58.3 155.84 19743.72 16050.78 24286.322007 124.6 64.2 171.61 21382.84 15525.16 29450.632008 143.1 91.48 244.53 34980.52 20463.30 59796.662009 131.6 53.48 142.96 18813.07 17318.56 20436.542010 151.7 71.21 190.35 28876.12 23012.89 36233.19Total 888.7 1139.05 148706.71 114743.65 198095.35

2004 2005 2006 2007 2008 2009 20100.0

50.0

100.0

150.0

200.0

250.0

300.0

Relationship Between Crude Price in Commod-ity Exchange and Inflation

Inflation

Trend of Crude Price

Year

Per

cent

age

Above diagram shows that variation in crude price is very high compare to inflation

rate. Correlation between these is 0.82 due to the high speculation in crude price in 2007 and

2008. It shows that Inflation and price of Crude oil in commodity exchange are positively

correlated. So speculation in commodity is directly affected to inflation.

Commodity: MCX Metal Index

42

Year InflationMetal Index

Trend in Metal Index XY X2 Y2

2006 106.5 2403 100 10654.1667 11351.13 100002007 118.3 2590 107.7819392 12753.298 14000.81 11616.952008 137.7 2752 114.5235123 15771.7964 18965.88 13115.632009 125.4 2707.9 112.6883063 14132.9917 15729.34 12698.652010 132.9 3453.83 143.7299209 19094.52 17649.12 20658.29Total 620.9 578.7236787 72406.7727 77696.28 68089.53

2006 2007 2008 2009 20100.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

Relationship Between MCX Metal Index and Inflation

Inflation

Trend in Metal Index

Year

Per

cen

tage

In the above diagram, we can say that inflation and Metal Index are going in hand in

hand from 2006 to 2010. Both shows increasing trend during these period. Percentage

increase in inflation is 32% while increase in metal index is 46% from 2006 to 2010.

Correlation between these is 0.6671. It shows that Inflation and metal index in commodity

exchange are positively correlated. So speculation in commodity directly affects inflation.

Commodity: MCX Agro Index

43

Year Inflation Agro IndexTrend in

Agro Index XY X2 Y2

2005 103.3 1341 100.00 10333.33 10677.78 100002006 115.8 1580 117.82 13649.20 13420.17 13882.152007 122.7 1700 126.77 15548.47 15043.02 16070.902008 131.6 1546 115.29 15166.98 17307.60 13291.122009 148.3 1953 145.64 21599.27 21995.36 21210.312010 174.3 2299 171.44 29873.28 30363.06 29391.41Total 795.9 776.96 106170.54 108806.99 603662.95

2005 2006 2007 2008 2009 20100.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

Relationship Between MCX Agro Index and Inflation

Inflation

Trend in Agro Index

Year

Per

cen

tage

Above diagram shows that inflation and trend in agro index are same also

showing increasing trend except in 2008. Correlation between these is 0.077. It shows that

Inflation and Agro Index in commodity exchange are positively correlated but their co

relation is low. So speculation in commodity is slightly affected to inflation.

Commodity: Maize

44

Year Inflation Price of Maiz Trend in Maiz XY X2 Y2

2005 110.3 5.55 100.00 555.00 12167.93 10000.002006 118.6 5.20 93.69 487.21 14067.94 8778.512007 130.6 7.15 128.83 921.13 17049.83 16596.872008 136.0 8.55 154.05 1317.16 18496.00 23732.652009 151.0 8.75 157.66 1379.50 22793.45 24855.942010 161.3 8.90 160.36 1427.21 26020.38 25715.45Total 807.8 794.59 6087.21 110595.52 109679.41

2005 2006 2007 2008 2009 20100.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

Relationship Between Maize price and Infla-tion

InflationTrend in Maiz

Year

Per

cent

age

Above diagram shows that inflation is continuously increasing during this time span.

While the Maize price is showing declining trend in 2006 but after that it continuously

increasing till 2010. Percentage increase in inflation and Maize is same which is 60%.

Correlation between these is 0.9118. It shows that Inflation and price of Maize in commodity

exchange are positively correlated. So speculation in commodity is directly affected to

inflation.

Commodity: Palm Oil

Year Inflation Price of Trend in XY X2 Y2

45

Palm Oil Palm Oil2005 94.2 24 100.00 9417.50 8868.93 10000.002006 97.2 16.82 70.08 6812.10 9447.84 4911.672007 106.1 22.7 94.58 10033.72 11253.67 8946.012008 114.4 35.28 147.00 16818.03 13089.27 21609.002009 111.1 32.7 136.25 15138.51 12345.06 18564.062010 109.7 35.6 148.33 16273.31 12035.78 22002.78Total 632.7 696.25 74493.16 67040.55 86033.52

2005 2006 2007 2008 2009 20100.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

Relationship Between Palm oil Price in Commodity Exchange and Inflation

Inflation

Trend in Palm Oil

Year

Perc

enta

ge

In the above diagram, we can say that inflation and raw palm oil price are showing

zigzag trend. Correlation between these is 0.8261. It shows that Inflation and price of palm

oil in commodity exchange are positively correlated. But speculation in commodity directly

not affects inflation because percentage increase in inflation is 9% while increase in price is

48% from 2005 to 2010.

6. FINDINGS

46

Sugar has been weighted at 1.73731 in inflation basket and correlation inflation and

prices of sugar is near to 1. So that they are positively related.

Gold is weighted at 0.36 in inflation basket and percentage increase in inflation is

175.28 and increase in price is 203.25 from year 2004 to 2010.

Silver has very less weigh at 0.01083 in inflation basket but correlation between

prices and inflation is near to .9975. which shows positive correlation.

Row cotton is weigh at 0.70488 and increase in price is 91.12 and increase in inflation

is 63.7%. And correlation is comparatively low from above three commodities.

Wheat has 1.11595 weights in inflation index. Correlation is 0.98310.

Aluminum has weighed at 0.48921 and correlation is 0.36 which is second lowest

among all eleven commodities. Increase in price and inflation is very low.

Crude oil has weighed at 9.36439 and it is positively correlated.

Mcx Agro index has weighed at 14.33709 which is highest among all commodity and

correlation is near to zero.

All the above findings are tabulated as below.

Time Period Comodity Weight

Correlation with Inflation

% Increase in Inflation

% Increase in commodity

price

2004-10 Sugar 1.73731 0.9979 70.4 87.11

2004-10 Gold 0.36 0.9987 175.28 203.25

2004-10 Silver 0.01083 0.9975 183.8 209.82

2004-10 Raw Cotton 0.70488 0.92900 63.7 91.12

2004-10 Wheat 1.11595 0.98310 71.9 59.4

2005-10 Aluminum 0.48921 0.36 25.7 2

2004-10 Crude Oil 9.36439 0.8287 51.7 90.35

2006-10 MCX Metal Index 10.74785 0.6671 32.9 43.7

2005-10 MCX Agro Index 14.33709 0.077 74.3 71.4

2005-10 Palm Oil 0.41999 0.8261 9.7 48.33

2005-10 Maize 0.21727 0.9118 61.3 60.36

7. CONCLUSION

47

Inflation is hurdle in the economic development it is priority of the government to monitor and controlled using various economic models. Inflation directly affects the purchasing power of every people in the country. There are various factors that affect inflation like supply side shortages, hoardings, speculation and other natural calamities.

It is believe that commodity market is highly driven by speculator by doing these speculative activities. Our analysis suggests that correlation between inflation and price in commodity exchange is around 0.9. From our above presumptions we can say that commodity exchange directly affect the inflation so government has to take controlling measures.

8. BIBLIOGRAPHY

48

Web Sites:

www.rbi.org.in

www.mosip.nic.in

www.mcxindia.com

www.ncdex.com

www.nmce.com

www.wikipedia.org

Articles:

Annual reports of MCX prepared by PWC

Commodity Review magazine