The sharp fall in commodity prices has come as a succour for India Inc reeling under slowing demand and rising finance costs.
The unwinding of speculative positions taken with ‘free money’ in the global commodity markets and a crackdown on the supply chain by governments across the world to fight inflation had unnerved investors, leading to a meltdown in commodity prices. This apart, logistics bottlenecks hampering the movement of goods has been eased out to facilitate smooth flow of goods.
Copper and lead prices have already fallen to a 52-week low, while aluminium and zinc are 10-15 per cent away from their 52-week low. Cotton futures at the Intercontinental Exchange has inched towards a 25-week low of $1.13 per pound, before settling at $1.14 on Friday.
Whenever commodity prices fall steadily, the user industries cut down their inventory and delay fresh purchases on expectations that prices will fall further.
Dr VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said the decline in commodity prices is a blessing in disguise for the manufacturing sector, especially for those using metals, which has seen the steepest fall.
“Leading indicators like direct and indirect tax collections and PMI indicate that the economic recovery in India continues to be robust. Rising interest rates may impact demand in interest-elastic segments after a lag,” he added.
India’s merchandise exports grew 15 per cent last month to $37 billion in May, while engineering exports increased 8 per cent to $9 billion compared to last year, despite challenges.
Ajay Kumar, Director, Kedia Commodities, said rising bank interest rates are sucking out excess global liquidity, but core investment in infrastructure and allied activities, especially in India, is intact and will drive growth.
The series of rate hikes by central banks globally has delivered the desired results by putting the brakes on demand, but growth prospects have not faded, he added.
With the deleveraged balance sheet, Corporate India is well-poised, even though the RBI may take its own assessment on commodity prices before deciding to halt a rate hike.
Asked whether RBI would pause the rate hike after the recent fall in commodity prices, Aditi Nayar, Chief Economist, ICRA said “we continue to expect rate hikes to be front-loaded as the consumer price index inflation is substantially above the medium-term target.”
The RBI has, so far, increased repo rates by 90 basis points in two instalments to 4.90 per cent, which is still below pre-pandemic levels. Interestingly, RBI has left its GDP growth forecast for this fiscal unchanged at 7.2 per cent.
June 25, 2022