The Securities and Exchange Board of India (Sebi) has called a halt to futures trading in key farm commodities on Monday as the world’s biggest importer of vegetable oils, and a key producer of wheat and rice, struggles to tame food inflation.

The year-long suspension, India’s most dramatic move since it allowed futures trade in 2003, will deny hedging options to traders and affect price discovery, weeks after farmers ended a year of protests that led to the scrapping of contentious reforms.

Deepak Jasani, head of retail research at HDFC Securities, said banning derivatives for seven agricultural commodities for one year seems to be a knee-jerk reaction to the unrelenting inflation pressure from food items.

Wholesale price-index based inflation had come at an unprecedented 40-year high of at 14.2 per cent. Traders said the government, facing intense pressure to rein in food prices ahead of key state elections early next year, wanted to curb speculation that might have fuelled the rises.

Sebi barred exchanges and trading members from launching new futures contracts and taking fresh positions for seven agri-commodities: wheat, paddy (non-basmati), chana, crude palm oil, mustard seeds and its derivatives, soybean and its derivatives and moong. More importantly, the restrictions are proposed to last for a year. Participants can only square up existing positions.

“While some correction in prices of these commodities may be expected in the near term, a sustained fall in the prices will happen when the supply of these commodities rises due to better crop or imports,” Jasani said.

The move could adversely affect importers who hedge their positions by entering into such contracts, analysts said. India imports close to 70 per cent of its edible oil requirements and a drop in production from countries such as Brazil and Argentina has led to a spike in prices, resulting in retail edible oil inflation coming at an elevated 29.7 per cent during November.

Though the government had cut import duties and set limits on how much edible oil dealers could stock, the steps have not made much of an impact largely because of international factors.

Speaking to The Telegraph, Anuj Gupta, VP-commodities & currency at IIFL Securities, said the prices had been going northwards largely on account of international factors.

Gupta pointed out that while the Centre’s step may soften inflation, it is a bad news for importers and traders who use futures trading in exchanges such as the NCDEX to hedge their risk.

Farm economist Abhijit Sen said the suspension of commodities trading “would have little impact in taming inflation. Over 60 per cent of the edible oil is imported and the suspension of their trade would impact inflation”.

With inputs from Reuters