CTT Infuses Inefficiency into Gold Futures Trading: An Empirical Analysis

The rationale behind introduction of CTT by government of India is still unclear. But as per few experts, revenue generation was the topmost priority behind the imposition of CTT, besides checking price volatility. In this study by adopting the bootstrap, and modified GARCH methodology, we assessed the impact of CTT in non-agriculture futures commodities with special reference to gold futures traded in MCX. The study finds that CTT has increased the price volatility in gold futures and has significantly reduced the turnover in trading volume, weakening the market to great extent. The imposition of CTT not only affected the gold futures market but also contributed to the inefficiency of the market as the market has still not yet been able to digest the shock that it had received after the implementation of CTT. As per the revenue generation is concerned, if sole purpose for introducing CTT in the commodity futures market was to increase the revenue, than it is not suitable for development of commodity futures market, because CTT has already increased the transaction cost, and market players have already responded to it as volume came down approximately to 43% to 53%. We conclude that CTT has direct impact on policy aspirations as there is a need to transform Indian markets into 'price setter' from being 'price takers'.