An Analysis of Commodity Price Volatility in India

Abstract

Fluctuations in prices of agricultural commodities can affect both consumers and producers adversely. Thus, price stabilization programs are an integral part of food policy in both developing and developed countries. Since India's independence in 1947, stability of the domestic prices has been one of the main objectives of the Indian food policy. This thesis analyzes price volatility of nine agricultural commodities in India using monthly wholesale price data. The study also analyzes the impact of market liberalization and other government policies on the price volatility in India and the effects of futures market on volatility of commodity prices. Various GARCH (Generalized Autoregressive Conditional Heteroskedastic) models are estimated for the analysis. Results show that devaluation of Indian Rupee and presence of futures market did not affect the domestic price variance of commodities. In case of wheat, sugar, groundnut oil, cotton and onion certain government policies did attain their stated objective of reducing price volatility. However, overall it can be said that most of the policies did not affect the price volatility.