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Economic slowdown in industrialised nations, demand compression, firming up of the dollar (against the euro) in recent weeks and broader financial market turmoil in the US have all combined to reverse the bullish sentiment in the global commodities market that only a few months ago saw prices galloping to record highs in energy products, metals and agricultural commodities. The focus of the commodity market has turned to the demand side as, without doubt, there is a stron g positive correlation between economic activity and consumption of energy products and metals. Inventories are beginning to build too, and speculative froth is vanishing rapidly. In agricultural commodities, there has been a rebound in production this year, in response to high prices and due to favourable weather.

The BRIC economies are also showing signs of slowdown; for instance, China’s metals demand has not sustained after the Olympics. With overall demand conditions deteriorating and no signs of an early revival, it is hardly surprising that commodity prices — whether of crude, steel, copper or palm oil — are what they are today. In a broad sense, commodity market prices have now returned to levels that are aligned more closely to the cost of production, although the price dynamics of each group of commodities — energy, metals, agriculture — are different. The upside risk to commodity prices has not gone away, either. Geopolitical tensions and supply constraints can, albeit selectively, change the sentiment. Then, there is the real possibility of the greenback weakening, at least in the short term, because of the $700-billion bailout package that is sure to further widen the US fiscal deficit.

As a major consuming economy, India is sure to benefit from the steep decline in commodity prices. For a government fighting inflation with its back to the wall, falling international commodity prices, especially of crude, steel and food products, must come as a welcome breather. Instead of reacting in a knee-jerk fashion, as is its wont, the Government must ensure that the benefit of falling commodity prices accrues to consumers who have been reeling under inflationary conditions. There is no need to rush into trade and tariff measures to please domestic lobbies that want protection from imports. A weakening rupee has given them enough support as it makes imports so much more expensive. Finally, the political angle. With elections round the corner, New Delhi can hardly afford to fritter away the opportunity to drag down inflation.

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