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Global commodity markets have plunged to multi-year lows on the back of slowing world economic growth, demand compression, large-scale unwinding of leveraged positions and government intervention. The precipitous fall in prices after a euphoric bull-run of nearly three years has generated considerable fear and panic in the marketplace. In a matter of months, the value of many important commodities has declined by as much as 50 per cent or more — crude oil, corn and soyabean are ready examples — with speculators being the first to exit long positions. Like greed, fear too feeds on itself. Conventional wisdom suggests that when the stock market declines, commodity markets go up. However, in recent years, both markets had rallied together and now, have collapsed together, suggesting that the risk perception of investors about various markets may have undergone a change and that markets are integrating.

A crucial driver of the market has been the dollar which after a weak run of nearly three years has now appreciated significantly, helping push the prices of dollar-denominated commodities lower. Having lost the appetite for risk, investors and traders are now looking for safety, rather than return, to ensure that their capital is intact. In some commodities such as crude oil, there is a strong belief the price decline may have been overdone, especially because the supply side concerns have not disappeared. In other words, notwithstanding the current poor sentiment, the upside risk to major commodity markets has not gone away. To improve liquidity, governments around the world, are cutting interest rates, easing monetary controls and offering massive bailout packages worth several hundreds of billion dollars. If that will help bring about a thaw in the credit market, the commodity markets are likely to bounce back.

In the ongoing global financial turmoil a major concern that has receded into the background is inflation. It may no longer be perceived as a critical issue; but recent market boosting measures (lowering of interest rates and loosening monetary restrictions) when taken together are a sure recipe for inflation to return. Re-emergence of inflation will reflect in rising commodity prices. India will not remain insulated. Despite the recent fall selectively, prices of many essential food commodities, energy products and metals are still at elevated levels here. A sharply depreciated rupee has substantially neutralised the benefit of lower global commodity prices. There is the danger that even before Indian consumers begin to enjoy the fruits of lower prices, the markets may change direction and begin to rally. In the anxiety to support the stock market, the continuing threat of inflation should not be lost sight of.

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