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In the RBI’s interest

A drop in commodity prices will offer temporary relief to an economy battered by low growth.

india Updated: Apr 23, 2013 21:33 IST
Hindustan Times

For the sake of analysis it is sometimes tempting to divide the world into two broad groups: those that export basic commodities and those that buy these. In an increasingly integrated world, where goods travel across borders seamlessly, the volume and direction of commodity shipments can prove to be a useful guide to gauge the health of economies. Stronger demand for a product will push up its price and vice versa. In the current context, in addition to the mismatches in demand and supply there is also a speculative component, particularly in two principal commodities — gold and oil — that are shaping the price curve. Policy makers across the world, more so in middle income countries such as India that until recently was an engine for global growth, continuously keep one eye on these trends that offer meaningful prescriptions to nurse the festering wounds of the local economy.

The fact that each country has a much more complicated net commodity export position makes it nearly impossible to formulate a model one-size-fits-all template for macroeconomic managers across the world to adopt. For India, indeed for the rest of the world, the level of action in the factory floors of China is of far greater consequence given its influence over global commodity prices. Exports from China pulled back sharply in March growing 10% compared with 21.8% in the previous year. Slow growth in factory output and a deceleration in import shipments of a raft of commodities — iron, copper, tin, nickel, and even oil — to China could potentially keep global commodity prices tempered down.

For India, the latest drop in commodity prices will offer a temporary balm to an economy battered by soaring prices and low growth for the most part of the last one year. Costlier crude oil, gold and other commodities had knocked up prices of most goods. It had also widened the current account deficit (CAD) to record levels. Lower commodity prices and a narrower CAD, therefore, make the job that much easier for the Reserve Bank of India to pare interest rates and for oil companies to cut retail fuel prices.

First Published: Apr 23, 2013 21:31 IST