Financial Derivatives – Real Challenges in India

India is among the top-5 producers of most of the commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22% to the GDP of the Indian economy. It employs around 57% of the labour force on a total of 163 million hectares of land. Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a major center for trading of commodity derivates. It is unfortunate that the policies of FMC during the most of 1950s to 1980s suppressed the very markets which were supposed to encourage and nurture to grow with times. It was a mistake. However, it is not in India alone that derivatives were suspected of creating too much speculation that would be to the detriment of the healthy growth of the markets and the farmers. The tremendous growth of the financial derivatives market and reports of major losses associated with derivative products have resulted in a great deal of confusion about those complex instruments. This paper highlights the real challenges of financial derivatives in India through factor analysis.