mahikarnam

In the past few weeks, we have in these columns been harping on the possibility of crude oil prices cooling off in the international markets in the short run. The crude oil price fall since July 11, the all time high of $ 147 a barrel, has been significant – around 19 per cent. The early impact of the fall has been showing on the Indian equity market, particularly, in the last couple of weeks.

As the sentiment improved, the short covering boosted the valuations. This week, the trend is likely to continue. Dalal Street may draw support from weakening crude oil price and is likely to bet on further decline of the prime commodity.
Changing time

Obviously it is a changing time. A bust in commodities markets, after nearly a seven-year-old boom, may well be in the making. But it is too early to predict with conviction. Last week, the global markets saw a major sell-off in resource stocks and commodities – from crude oil to cocoa and copper – prompting some analysts to officially declare the end of the red hot commodity rally and greenback strengthened after the US Federal Reserve Board left interest rates unchanged, as was widely expected.

A worsening global growth outlook and prospects for increased supply sent raw materials tumbling from record highs in the past month. Reports, such as, many in the US were driving less or some seeking alternative transport in the other developed economies and the world biggest copper user China is slashing purchases of copper as shipments of air conditioners and refrigerators slow have been appearing more frequently in recent weeks.

In the short term Dalal Street will attempt to factor in the correction in the global commodities. However, a time lag in realising the impact on Indian prices and inflation will lend an element of volatility to the equity markets.
Inflation worries

If there is change in course in commodities, it will not only have an impact on the country’s current account deficit, but on inflation, growth, corporate profits and also on politics.

The liquidity flow to the equity market, which has dwindled, can be expected to improve if a clear direction in the global financial and commodities market emerges.

The country’s current focus on containing inflation below a double-digit growth could shift for the GDP growth if the crude oil prices correct below $ 100 a barrel and sustain. The cost-push factors including interest rates are now creating an inflationary spiral.

Even though the current inflationary pressure originated from the flare-up in global crude oil and commodities – primarily external sources – it began to feed or fuel on itself in the recent months. Now, perhaps, inflation has entered into the expectations of the economic agents; it has somewhat been taken for granted as a permanent feature for next few quarters