India imposes ban on rice export, triggers inflation fears

India's decision to ban non-basmati white rice exports will spur traders to cancel contracts to sell around 2 million metric tons of the grain, worth $1 billion, on the world market, dealers said on Friday.

India, which accounts for 40% of world rice exports, on Thursday ordered a halt to its largest rice export category to calm domestic prices, which climbed to multi-year highs in recent weeks as erratic weather threatens production.

Anticipating that the government would impose restrictions on rice exports, traders have obtained letters of credit (LCs), or payment guarantees, over the past few days, said a Mumbai-based dealer with a global trade house.

"But the trade wasn't expecting the government to impose restrictions so soon. It was expecting them to come into effect in August or September. As a result, these traders have no choice but to use the force majeure clause to cancel the contract," he said.

Force majeure refers to unexpected external circumstances that prevent a party to a contract from meeting their obligations.

Four dealers confirmed that export contracts of around 2 million metric tons of rice, worth $1 billion, are at the risk of being cancelled.

On Thursday, the government said the ban would be effective from July 20, and only vessels currently loading would be allowed to export, not future shipments backed by LCs.

"Traders typically sign contracts in advance, so the contracts signed for the next few months cannot be executed now," Nitin Gupta, senior vice president of Olam Agri India Ltd told Reuters.

Before the export ban, India used to sell around 500,000 tons of non-basmati white rice every month, Gupta said.

Around 200,000 tons of rice is being loaded at various Indian ports, and this quantity would be allowed to move out, said B.V. Krishna Rao, president of the Rice Exporters Association.

But the government should also allow exporters with valid LCs to ship out their cargoes, Rao said.

Two traders and one government official said India was unlikely to allow any such exemption.

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