Negative Impact of CTT on Gold Futures Traded in MCX : Analysis of Evidence Using Impulse Response Function

The primary reason for the existence of commodity derivatives market is to offer instruments for price discovery and risk management. Imposition of CTT on futures trading in non-agriculture commodities has allegedly disturbed the Indian commodity market from carrying out its function price discovery and risk management. MCX, a world leader in Gold futures, experienced significant drop in volume, since July 2013. Experts argue that CTT is indirectly halting India's strong presence in such market, by making a way for exchanges in other countries where there are no transaction taxes like CTT. In this background, this study tries to throw light on the impact on imposition of CTT in India's non-agricultural commodities, particularly gold futures market, by analyzing the variables such as trading volume, intraday volatility and Bid-Ask spread. Using VAR based Impulse response function, the study is conducted in three different scenarios. Viz. (a) before implementing CTT (b) after implementing CTT and (c) by assuming that the CTT is repealed. The result shows that there is a significant drop in trading volume and increase in volatility after implementing CTT. For third scenario, which assumes that the government repeals the CTT, the results indicate there would be significant increase in trading volume and reduced volatility in the market. Hence, this paper concludes that if the reason behind imposition of CTT was to generate revenue, control speculation, discourage noise traders, and to reduce volatility etc. than the idea does not hold well in the present scenario