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Most commodities tumble: why for importer India, news isn’t bad

India is unique as an EME that is predominantly an importer rather than exporter of commodities.

Written by Harish Damodaran | New Delhi |
August 25, 2015 4:45:49 am
Sensex fall, US Federal Reserve, EME, Sensex EME, Sensex GDP, Indian economy, Indian import, India export, Business, market news, nation news, india news The third reason for India being much better placed than in June-August 2013 is its macro fundamentals. (Source: Reuters photo)

Monday’s market bloodbath — the Sensex down almost 6 per cent and the rupee falling to its lowest since September 4, 2013 — revived memories of June-August 2013. That was the time of “taper tantrums”, when the markets began factoring in an imminent winding down of the US Federal Reserve’s $ 85 billion-a-month long-term asset purchases or “quantitative easing” programme. The possibility of it, first suggested by then Fed chairman Ben Bernanke in end-May, triggered huge capital outflows from emerging market economies (EME).

India was, then, among the most vulnerable of EMEs — given its current account deficit at $88.16 billion or over 4.7 per cent of GDP in 2012-13, retail inflation rates of nearly 10 per cent, and uncontrolled fiscal deficits. No wonder, foreign institutional investors pulled out some $13 billion from Indian debt and equity markets during June-August, the RBI’s foreign currency assets dipped by $11.1 billion over this period and the rupee hit a record low of 68.85-to-the-dollar on August 28, 2013.

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This time, however, things are somewhat different. To start with, the cause of the current meltdown is not the US Fed’s prospective monetary policy actions – a raising of interest rates that seemed inevitable until recently – but the increasingly bad news emanating from China. The collapse of its asset bubbles – first, in property and, more recently, in stock markets – has sparked concerns that the country’s economic slowdown is for real. The Chinese central bank’s devaluation of the Yuan earlier this month only reinforced these fears
But that links up to the second point. The countries most vulnerable to a slowing dragon are the commodity-exporting EMEs – from Brazil, Argentina, Chile and Peru to Indonesia, Malaysia and South Africa. For them, and also for the likes of Australia and New Zealand, China buying less has huge implications that extend to impacting global prices for commodities be it crude oil, coal, iron ore, copper, aluminium, nickel, soybeans or milk powder.

India, on the other hand, is unique as an EME that is predominantly an importer rather than exporter of commodities. In 2014-15, India imported, among other things, $116.44-billion worth of crude petroleum, $17.69 billion of coal and coke, $6.59 billion of bulk minerals and ores, and $6.33 billion of finished fertilisers. Low international commodity prices – for minerals and ores, though not farm products – are, thus, beneficial for India. A Chinese slowdown, in that sense, is not the same as monetary tightening by the US Fed Reserve. For India, the threat from latter is far more serious, both by way of affecting capital flows to EMEs and making it that much difficult for the RBI to reduce interest rates.

The third reason for India being much better placed than in June-August 2013 is its macro fundamentals. The current account deficit in 2014-15 was a mere $27.94 billion or 1.3 per cent of GDP, an improvement over even the $32.4 billion (1.7 per cent) for the preceding fiscal. Between August 30, 2013 and now, the RBI’s forex assets have swelled by roughly $83.5 billion and the current reserves of $354.43 billion can finance well over nine months of imports. The “twin deficits” (including the government’s finances) aren’t as serious a concern, even while CPI inflation for July was just 3.78 per cent.

All said, the confluence of global factors is not as bleak today for India as it was in the taper tantrum days. One shouldn’t be surprised to see international investors, too, make a distinction between India and other EMEs – more so, in a scenario where oil would hover around $ 40-50 per barrel.

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