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.

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.

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:
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:

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:

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):

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

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
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.

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
  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
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:

Volume(in
Financial Years Value(Rs. in lakh)
MT)
2000-01 1744860 422899.77
2001-02 2527235 724673.11
2002-03 9106500 3437638.20
2003-04 13154449 5301386.50
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
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,
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
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.

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
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,
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.
 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
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
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
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
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

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
 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
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

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.

➢ 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

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.
 1. Problem Statement and Objective of
study

Problem Statement:

• 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:

 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

• 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
 Sugar Trend in
Year Inflation-X price Sugar Price-Y XY X2 Y2
2004 97.70 1650.10 100.00 9770.00 9545.29 10000.00
2005 107.90 1837.68 111.37 12016.59 11642.41 12402.79
2006 112.90 1934.30 117.22 13234.50 12746.41 13741.28
2007 94.90 1498.60 90.82 8618.70 9006.01 8248.04
2008 101.00 1735.30 105.16 10621.50 10201.00 11059.32
2009 149.20 2708.92 164.17 24493.72 22260.64 26950.81
2010 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

n ( ∑ xy ) − ( ∑ x ) ( ∑ y )
r=
n ( ∑x ) −( ∑ x)
2 2
n ( ∑ y ) − (∑ y )
2 2

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
 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
Trend in Gold
Year Inflation-X Price of Gold price-Y XY X2 Y2
2004 100.44 6116.11 100.00 10044.44 10089.09 10000.00
2005 102.27 6385.17 104.40 10676.56 10458.47 10899.19
2006 142.84 8904.17 145.59 20795.68 20403.74 21195.14
2007 150.07 9277.17 151.68 22762.74 22520.00 23008.08
2008 188.08 12072.67 197.39 37124.37 35372.21 38963.33
2009 228.30 15495.30 253.35 57840.31 52120.89 64187.34
2010 275.78 18547.00 303.25 83628.30 76051.85 91959.54
Total 1187.77 76797.59 1255.66 242872.40 227016.25 260212.63

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
 Trend in Silver
Year Inflation-X Silver price Price-Y XY X2 Y2
2004 100.3 10446.33 100.00 10034.44 10069.01 10000.00
10675.876
2005 101.0 10793.58 103.32 10436.60 10202.68 7
27537.481
2006 155.1 17335.08 165.94 25743.48 24066.35 5
31613.708
2007 171.8 18573.83 177.80 30552.39 29526.69 9
41913.309
2008 192.9 21386.50 204.73 39488.50 37203.98 1
52317.891
2009 202.0 23894.00 228.73 46213.20 40820.84 9
95989.502
2010 283.8 32365.00 309.82 87919.66 80528.25 4
232417.8 270047.77
Total 1207.0 1290.35 250388.27 0 1

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

Price of
Inflation- Raw Trend in price of
Year X Cotton Raw Cotton-Y XY X2 Y2
2004 105.6 349 100.00 10555.56 11141.98 10000.00
2005 87.4 340 97.42 8514.61 7638.76 9490.89088
2006 96.2 364 104.30 10029.12 9246.43 10878.0716
2007 106.3 426 122.06 12978.35 11305.01 14899.3851
2008 138.0 485 138.97 19176.49 19041.70 19312.2388
2009 134.2 613 175.64 23575.91 18016.35 30851.0603
2010 163.7 667 191.12 31279.56 26786.78 36525.8906
Total 831.3 929.51 116109.61 103176.99 131957.537
 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
Trend in
Wheat Price-
Year Inflation-X Wheat Y XY X2 Y2
2004 100.0 7.81 100.00 9997.78 9995.56 10000.00
2005 100.8 7.74 99.10 9993.78 10169.04 9821.55
2006 121.3 9.43 120.74 14641.05 14703.58 14578.78
2007 132.8 10.7 137.00 18199.82 17646.91 18770.05
2008 144.5 11.5 147.25 21272.30 20870.62 21681.71
2009 159.8 12.27 157.11 25097.73 25520.06 24682.38
2010 171.9 12.45 159.41 27408.07 29561.07 25411.87
Total 931.1 920.61 126610.53 128466.84 124946.35

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
Trend of
Aluminum
Year Inflation Aluminum Price XY X2 Y2
2005 105.1 97.45 100 10508.3333 11042.51 10000.00
2006 122.2 124.95 128.2 15665.2296 14926.73 16440.2658
2007 124.8 114.98 118.0 14729.9075 15585.44 13921.3362
2008 128.7 109.23 112.1 14422.0215 16555.11 12563.7759
2009 120.4 88.7 91.0 10961.9668 14504.19 8284.82907
2010 125.7 99.3821 102.0 12820.9198 15804.68 10400.4625
Total 726.9 651.3 79108.3786 88418.66 71610.6694
 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

Crude Trend of
Year Inflation Price Crude Price XY X2 Y2
2004 98.3 37.41 100 9827.78 9658.52 10000.00
2005 112.8 50.04 133.76 15082.67 12714.44 17892.01
2006 126.7 58.3 155.84 19743.72 16050.78 24286.32
2007 124.6 64.2 171.61 21382.84 15525.16 29450.63
2008 143.1 91.48 244.53 34980.52 20463.30 59796.66
2009 131.6 53.48 142.96 18813.07 17318.56 20436.54
2010 151.7 71.21 190.35 28876.12 23012.89 36233.19
Total 888.7 1139.05 148706.71 114743.65 198095.35

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

Metal Trend in Metal
Year Inflation Index Index XY X2 Y2
2006 106.5 2403 100 10654.1667 11351.13 10000
2007 118.3 2590 107.7819392 12753.298 14000.81 11616.95
2008 137.7 2752 114.5235123 15771.7964 18965.88 13115.63
2009 125.4 2707.9 112.6883063 14132.9917 15729.34 12698.65
2010 132.9 3453.83 143.7299209 19094.52 17649.12 20658.29
Total 620.9 578.7236787 72406.7727 77696.28 68089.53
 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

Trend in
Year Inflation Agro Index Agro Index XY X2 Y2
2005 103.3 1341 100.00 10333.33 10677.78 10000
2006 115.8 1580 117.82 13649.20 13420.17 13882.15
2007 122.7 1700 126.77 15548.47 15043.02 16070.90
2008 131.6 1546 115.29 15166.98 17307.60 13291.12
2009 148.3 1953 145.64 21599.27 21995.36 21210.31
2010 174.3 2299 171.44 29873.28 30363.06 29391.41
Total 795.9 776.96 106170.54 108806.99 603662.95

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
Year Inflation Price of Maiz Trend in Maiz XY X2 Y2
2005 110.3 5.55 100.00 555.00 12167.93 10000.00
2006 118.6 5.20 93.69 487.21 14067.94 8778.51
2007 130.6 7.15 128.83 921.13 17049.83 16596.87
2008 136.0 8.55 154.05 1317.16 18496.00 23732.65
2009 151.0 8.75 157.66 1379.50 22793.45 24855.94
 2010 161.3 8.90 160.36 1427.21 26020.38 25715.45
Total 807.8 794.59 6087.21 110595.52 109679.41

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
Palm Oil Palm Oil

2005 94.2 24 100.00 9417.50 8868.93 10000.00

2006 97.2 16.82 70.08 6812.10 9447.84 4911.67

2007 106.1 22.7 94.58 10033.72 11253.67 8946.01

2008 114.4 35.28 147.00 16818.03 13089.27 21609.00

2009 111.1 32.7 136.25 15138.51 12345.06 18564.06

2010 109.7 35.6 148.33 16273.31 12035.78 22002.78

Total 632.7 696.25 74493.16 67040.55 86033.52

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

➢ 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.

% % Increase in
Time Correlation Increase in commodity
Period Comodity Weight with Inflation Inflation 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
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

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