Commodity crash to back up stock markets

Font Size

Print

Feedback

Email

Discuss

When the Indian markets open on Monday morning, the big news for the traders is expected to be the rapid unwinding of inflation for the rest of this fiscal. On Friday, amid the market mayhem, very few noticed that the bellwether Reuters/Jefferies CRB Index of 19 commodities recorded its biggest drop in 50 years. The CRB fell 20.64 points to 289.89, the lowest since January 18, 2007. The index has slumped 39% from a record on July 3 and declined 20% in the past two weeks.

For India, this is top-notch news, as the steep price fall would cascade on manufacturing and farm sectors and, thus, could give the stock markets support when foreign funds are pulling out.

Analysts have agreed that despite the declining rupee, such a massive fall in commodity prices will lower raw material prices for industry significantly. Abhijit Sen, member, Planning Commission, said, “On balance, we can say there will be a rapid drop in (domestic) inflation from now.”

The only commodity that has bucked the trend is gold, which rose due to its allure as a safe-haven investment.

The biggest drop in the commodity space, as Sen points out, is in raw materials like metals, oil seeds and cotton that have a significant roll-on impact on the manufacturing sector. Primary commodities comprise 98 of the 435 commodities covered in the wholesale price index and account for 39.4% of the coverage. Figures released on Friday shows the weekly inflation rate has eased to 11.80%.

According to Bibek Debroy, research professor at the Centre for Policy Research, the pass through effects of raw materials on the manufacturing sector will be substantial this fiscal. “I will expect the GDP deflator (loosely the CPI-IW) to be about 7% before March as a result”, he said.

In India, soyabean and soyabean oil prices fell below their margin limits during last week as global markets slumped. On Friday, October soybean contract on NCDEX slumped 2.75% to Rs 1,646 per quintal.

Analysts said the big story was in the palm oil sector, where prices have dropped below the crucial support of 2,000 ringgits per tonne.

Palm oil prices have a direct bearing on Indian edible oil and oilseeds markets as the commodity is used as an efficient substitute for soyabean oil. Already, there are reports that after defaulting in honouring their palm oil import contracts, Indian traders have now upped their buying from the spot markets.