IN COLONIAL times, the Coronation Building in old Delhi was one of the city's most prestigious hotels. Today, it is home to a commodity-futures market. But you would not know it. The Rajdhani Oil and Oilseeds Exchange is hidden among a cluster of small shops and peopled by men in kurta pyjamas, their hair dyed with henna, reclining in the afternoon heat under rusted fans. Over an ageing intercom, they take orders to buy and sell mustard seed and jaggery for delivery one or two months hence. The day's opening and closing prices are chalked on a blackboard.

The blackboard shows that prices of the two commodities have fallen in recent weeks. This will come as a relief to India's policymakers, who are frantically seeking to suppress a nasty bout of commodity-price inflation. On April 4th the Ministry of Commerce and Industry revealed that wholesale-price inflation, the measure most closely watched by the Reserve Bank of India (RBI), the central bank, rose to 7% in the 12 months to March 22nd, its highest rate since December 2004. This price pressure is worrying. But the government's panicked response to it is even more so.

Behind the jump in inflation were higher prices for fuel, food (including edible oils) and metals. The price of iron ore leapt by 46%. This has spooked the government, which faces elections in several big states as well as a national poll before next spring. In response, it has cut import duties on edible oils and banned the export of pulses and rice (except for basmati rice). It even briefly banned the export of edible oils, such as coconut oil, much to the chagrin of Keralite emigrants to the Gulf, who swear by the stuff to keep their hair black and their joints flexible.

Steelmakers in particular have felt the sharp edge of the government's resolve. The Steel Authority of India (SAIL), a state-owned steelmaker, boasts that “there's a little bit of SAIL in everybody's life”, a slogan that runs above pictures of metal bridges, pipes, jugs and even dog-food bowls. After prices rose by more than 20% in the first three months of the year, everybody's life became a bit dearer. Carmakers and scooter-makers protested to the government. Dog-owners no doubt joined them in spirit.

The government threatened to add steel to its list of 15 “essential commodities”, which would allow it to dictate the production and distribution of the alloy. In response, steelmakers “voluntarily” agreed to cut the prices of steel bars used in construction and the corrugated sheets that poor households use for roofing. But steelmakers complain that they are merely passing on the rising costs of coke and iron ore. They fear being caught between “the two prongs of a pincer”, according to the Indian Steel Alliance, an industry group.

Commodity traders, such as the ones reclining in the Coronation Building, fear they may be next in line. Last year the government banned futures trading in two types of bean, rice and wheat, arguing that speculators were driving up prices, beyond what the fundamentals would dictate. Some in the leftist parties, on whose support the government relies, now argue it should extend the ban to other commodities, such as edible oils and perhaps even iron and steel.

This would be like “shooting the messenger”, argues B.C. Khatua, chairman of the Forward Markets Commission, which regulates futures exchanges. Before they were shut down, he points out, the futures markets conveyed the message that prices of wheat and rice would continue to rise. Sure enough, that is what happened.

Banning futures trading would do little to curb prices, especially for commodities like edible oils that are heavily imported. But it would arrest the development of India's financial system, which is finally growing more sophisticated. Since 2003, the government has allowed trading in future contracts for many commodities. One of the two main exchanges, the Multi Commodity Exchange, averages volumes of over $3 billion a day. The Rajdhani exchange turns over about $20m a month.

Great hopes for such markets were expressed this week in a report by a 12-man committee on financial-sector reform, appointed by the planning commission, and led by Raghuram Rajan, now of the Chicago Graduate School of Business, and formerly chief economist of the IMF. It laments “the knee-jerk reaction to ban [markets] or intervene in them whenever they send unpleasant messages.”

The futures market provides farmers with a sneak preview of the prices they will face in the months ahead, which should allow them to make an informed decision about what to sow. In principle, futures contracts should also allow farmers to lock in a price for their crops, insulating them from the vagaries of the spot market. At the moment, farmers are too small to participate in the market directly. But Mr Rajan's report suggests that small banks could aggregate the demands of farmers up to a practical size.

“Just as it is counter-intuitive to steer in the direction of the skid”, Jagdish Bhagwati of Columbia University once wrote, “it is difficult to persuade the layman” that the best solution to scarcity is a market price, which encourages supply and discourages demand. As Bajrang Lal Goyal, a trader who joined the Rajdhani exchange 40 years ago, points out, India's winter crop is just days away from hitting the market. If the politicians who bash the futures market could be bothered to look at the message it is conveying, they would see that the prices of several sensitive commodities are already on their way down. Just in time, that is, for the elections.