Commodities fall on recession fears: Why this could be good news for India
Recession fears in the United States and Europe had only hammered global equities earlier, but have now started to creep into commodities as prices for metals such as copper, aluminum and zinc, which reached record levels after the outbreak of the Russian-Ukrainian conflict, have fallen significantly. .
The Bloomberg Commodity Spot Index, which tracks 23 energies, metal and crop futures, lost more than 20% after hitting a record high in June as recession fears ravaged what was one of the most resilient corners of the market.
Crude Brent oil has fallen over the past few days on fears of a recession.
Brent crude futures fell to $98.5 a barrel on Wednesday, falling below $100 a barrel for the first time since April 25, as recession fears in the West fueled further selling. wide.
Even copper and lead prices fell to a 52-week low. Cotton futures on the Intercontinental Exchange hit a 25-week low at $1.13 a pound last week.
Gold, which had risen above $1,800 again at the end of last week, fell to $1,755 an ounce, while steel slipped to a nine-month low of 4,242 Chinese yuan a tonne.
Prices for everything from gasoline to wheat are crashing on fears a sluggish economy will hurt demand. However basic supplies remain tight, the pullback could bring some much-needed relief to consumers struggling with runaway inflation.
Commodities had been rising since the early days of the global pandemic as massive government spending and ultra-low interest rates supported demand while production was dampened. Russia’s war in Ukraine has exacerbated supply disruptions.
But the sentiment has changed as fears grow that the Federal Reserve will not be able to rein in the highest inflation in four decades without plunging the economy into a recession. A surge in the US dollar – which makes it more expensive to buy commodities priced in dollars – has also weighed on US-traded commodities. Hedge fund managers recently cut bets on rising commodity prices to the lowest in nearly two years.
“On average, prices for energy, base metals, precious metals and agriculture are now down 25% from 52-week highs as markets price in a global slowdown turning into a a real global recession,” SBI noted in a research report.
Samiran Chakraborty, India economist at Citigroup, said in an interview with Bloomberg Television on Monday that “India being a net importer of commodities should win on the inflation front.”
With base metal prices falling, user industries like white goods and automotive would now be able to reduce their input costs and improve their margins.
Even prices of major edible oils have fallen on world markets since June. Between June 1 and July 1, the landed price of crude palm oil fell by almost 24%, while soybean oil and sunflower oil fell by 17.4 and 12, 2%, respectively. The drop in edible oil prices was mainly due to Indonesia lifting its palm oil export ban. India imports more than 60% of its edible oil needs.
According to government statistics, since the beginning of this month, average retail prices for packaged edible oils have declined slightly nationwide, with the exception of peanut oil, which hovers between Rs 150 and 190 per month. kg.
The Reserve Bank of India (RBI) may not need to revise upwards its FY23 inflation forecast due to lower global crude oil and industrial metal prices.
Lower commodity prices, especially crude oil, should reduce imported inflation risks for India. Citigroup recently warned that crude prices could reach $65 a barrel by the end of this year in case the recession hits and cripples demand in advanced economies.
This could cushion the negative impact on the rupee, which is battered by fears of a record trade deficit and the continued withdrawal of foreign portfolio investors from Indian financial markets.
“If oil prices stay lower, say around $100 a barrel, that negates the need for an upward inflation review by the Monetary Policy Committee,” said economist Madan Sabnavis. in Chief, Bank of Baroda. “Prices of other commodities have already started falling since May. If the (easing) trend continues, it should help reduce the trade deficit, a key concern weighing on the value of the rupee against the dollar.”
The rupee gained 0.09% to close at 79.30 to the dollar on Wednesday. It was the fourth best performing Asian currency during the day, Bloomberg data compiled by ETIG showed. It hit a lifetime low of 79.38/$ on Tuesday.
“If oil prices remain weaker, we are unlikely to see an upward revision in inflation prices,” said Rahul Bajoria, Indian economist at Barclays. “The monsoons will play a key role here, influencing food prices as well as crude oil. We need to see how global commodity prices develop in the coming weeks, which will help reduce the trade deficit. ”
According to rating agency Crisil, a drop in the Brent benchmark price will have a positive impact on India in terms of reducing overall inflationary pressure.
India imports 85% of its crude needs. The world’s third-largest oil consumer imported 212 million tonnes (MT) of crude oil in 2021-22 for $120 billion.
Lower oil prices should also help close the trade deficit. “Any reduction in the trade deficit will work well, stopping any sudden loss in the value of the rupee against the dollar,” he said.
In addition, RBI has also announced a series of measures aimed at increasing capital inflows by making NRI deposits more attractive.
India’s trade deficit, or the excess of imports over exports, hit a record $25.63 billion in June, driven by oil, coal and gold imports.
Meanwhile, economic activity showed an uptick in June 2022. The PHDCCI Economy GPS Index, which captures the momentum of supply-side business activity through growth in GST collections, the consumer behavior on the demand side through the growth of passenger vehicle sales volume and the sensitivity of policy reforms and the impact of the domestic and international economic and business environment through the movement of SENSEX in the year baseline 2018-19 = 100, for June 2022 increased to 136.6 from 128.0 in May 2022.
Growth of passenger vehicles recorded a sequential growth of 27.7% while gross GST collections in June 2022 increased to Rs. 1,44,616 crore and recorded a sequential growth of 2.6% in June 2022 per compared to Rs. 1,40,885 crore in May 2022.
According to an analysis by SBI, sectors such as pharmaceuticals and new era sectors such as healthcare have observed higher working capital limits. , electric vehicles, electronics, commercial real estate, food processing, etc. will drive credit growth in the coming quarters,” said Dr. Soumya Kanti Ghosh, Group Chief Economic Advisor at State Bank of India.
India’s services activity also grew at the fastest pace in eleven years in June 2022. From 58.9 in May to 59.2 in June, the S&P Global India Services PMI business activity index seasonally adjusted was at its highest level since April 2011.
With agency contributions