THE IMPACT OF COMMODITY TRANSACTION TAX ON FUTURES TRADING IN INDIA: AN EX-ANTE ANALYSIS
Trading in commodity derivatives on exchange platforms is an instrument to achieve price discovery and better price-risk management besides helping the macroeconomy with better resource allocation. In the 2008–2009 budget, the Indian government proposed to impose a commodity transaction tax (CTT) amounting to 0.017% of trading value. In this context, we examine the relationship between trading activity, volatility and transaction cost for five most traded commodities in India. Results suggest that there exists a negative relationship between transaction cost and liquidity and a positive relationship between transaction cost and volatility. Further, the results of structural model support the results of VAR analysis. Therefore, if the government imposes CTT, it would lead to higher volatility and lower trading activity affecting market efficiency and liquidity.