Commodities fall on recession fears: why this could be good news for India

Fears of structurally high inflation could dissipate in India due to the recent drop in commodity prices, after recession fears in developed economies, a strong dollar index and rising interest rates worldwide.
Recession fears in the US and Europe had only weighed on global equities before, but have now started to weigh on commodities as well, as prices for metals such as copper, aluminum and zinc, which have shot to record levels after the outbreak of the conflict between Russia and Ukraine, have fallen considerably. .
The Bloomberg Commodity Spot Index, which tracks 23 energy, metal and crop futures contracts, has lost more than 20% after hitting a record high in June as fears of a recession gripped what was one of the market’s most resilient corners.
Brent Crude oil it has been falling in recent days amid concerns of a recession.
Brent crude futures fell to $98.5/barrel on Wednesday, dipping below $100/barrel for the first time since April 25, as recession fears in the west fueled a broader sell-off.
Even copper and lead prices have fallen to a 52-week low. Cotton futures on the Intercontinental Exchange hit a 25-week low of $1.13 a pound last week.
Gold, which had broken above $1,800 again at the end of last week, fell to $1,755 an ounce, while steel it fell to a nine-month low of 4,242 Chinese yuan per tonne.
Prices of everything from gasoline to wheat are plummeting on concern that a stagnant economy will hurt demand. Though commodity supplies being strict, the withdrawal could bring much-needed relief to consumers struggling with rising inflation.
Commodities had been rallying since the early days of the global pandemic as massive government spending and ultra-low interest rates boosted demand while curtailing production. Russia’s war in Ukraine exacerbated supply disruptions.
But sentiment has changed as fears mount that the Federal Reserve won’t be able to rein in the highest inflation in four decades without tipping the economy into recession. A rise in the US dollar, which makes it more expensive to buy US dollar-valued commodities, has also weighed on US-traded commodities. Hedge fund managers recently cut bets on higher commodity prices to the lowest level in nearly two years.
“On average, energy, base metals, precious metals and agricultural commodity prices are now down 25% from 52-week highs as markets anticipate a global slowdown morphing into a global recession in full-fledged,” SBI said in an investigative report.
Samiran Chakraborty, India economist at Citigroup, in an interview with Bloomberg Television on Monday said that “India, being a net importer of commodities, should win on the inflation front.”
With base metal prices falling, downstream industries such as home appliances and automobiles would now be in a position to reduce their input costs and improve margins.
Even the prices of major edible oils have plummeted on world markets since June. Between June 1 and July 1, the landed price of crude palm oil fell by almost 24%, while soybean and sunflower oil fell by 17.4 and 12.2%, respectively. The drop in edible oil prices has been mainly driven by the lifting of Indonesia’s palm oil export ban. India imports more than 60 percent of its edible oil requirement.
According to government statistics, since the beginning of this month, the average retail prices of packaged edible oils have decreased marginally across the country, with the exception of peanut oil, which ranges between Rs 150-190 per kg.
The Reserve Bank of India (runs batted in) may not need to revise up its FY2023 inflation forecast due to falling global prices for crude oil and industrial metals.
Lower commodity prices, particularly crude oil, should reduce imported inflation risks for India. Citigroup recently warned that crude prices could hit $65 a barrel by the end of this year should the recession hit and cripple demand in advanced economies.
This could cushion the negative impact on the rupee, which is being hit by concerns of a record trade deficit and the continued withdrawal of foreign portfolio investors from India’s financial markets.
“If oil prices stay at the bottom, say around $100 a barrel, it removes the need for an upward revision of inflation by the Monetary Policy Committee,” said Madan Sabnavis, chief economist at Bank of Baroda. “Other commodity prices have already started to soften since May. If the (weakening) trend continues, it should help reduce the trade deficit, a key concern weighing on the rupee’s value against the dollar. ”
The rupee gained 0.09% to close at 79.30 per dollar on Wednesday. It was the fourth-best performing Asian currency on the day, according to Bloomberg data compiled by ETIG. It reached an all-time low of 79.38/$ on Tuesday.
“If oil prices remain lower, it is unlikely that we will see an upward revision of inflationary prices,” said Rahul Bajoria, Indian economist at Barclays. “The monsoons will play a key role here, influencing food prices along with crude oil. We need to see how general commodity prices shape up in the coming weeks, helping to reduce the trade deficit. ”
According to rating agency Crisil, a fall in the benchmark Brent 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 gap. “Any reduction in the trade deficit will work well, stopping any sudden loss in the value of the rupee against the dollar,” he said.
Furthermore, RBI has also announced a series of measures to increase capital inflows by making NRI deposits more attractive.
India’s trade deficit, or excess of imports over exports, rose to a record $25.63 billion in June, boosted by imports of oil, coal and gold.
Meanwhile, economic activity showed a rebound in June 2022. The PHDCCI Economy GPS Index, which captures the momentum in supply-side business activity through growth in GST collections, supply-side consumer behavior demand through volume growth in passenger vehicle sales and the sensitivity of political reforms and The impact of the domestic and international economic and business environment through the movement of SENSEX in the base year of 2018-19 = 100, for June 2022 it has increased to 136.6 compared to 128.0 in May 2022.
The growth of passenger vehicles has recorded a sequential growth of 27.7%, while the gross collection of GST in June 2022 increased to Rs. 1,44,616 crore and has recorded a 2.6% sequential growth in June 2022 as compared to Rs. Rs 1,40,885 crore in May 2022.
According to an analysis by SBI, sectors such as pharmaceuticals and new-age sectors such as healthcare have seen them cling to higher working capital utilization 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 Adviser at State Bank of India.
India’s services activity also expanded at the fastest pace in eleven years in June 2022. Rising from 58.9 in May to 59.2 in June, the adjusted S&P Global India Services PMI Business Activity Index seasonally reached its highest mark since April 2011.
With contributions from agencies

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