How key commodities swing with currency movements

Though demand-supply is the prime factor influencing commodity prices, any variation in the value of currency will also have a telling effect on prices . Since India meets its demand for various products through imports, a weak rupee will escalate its landed cost and apparently, that will have an effect on retail prices as well.

Apart from non-agriculture commodities such as gold, silver, crude oil and base metals, the edible oil complex and cotton are the other commodities that are largely influenced by a weaker rupee.

India is the world’s largest gold importer and the second largest consumer. Imports will be costlier if the rupee weakens and sellers pass on the extra cost to the end consumers. Ultimately, local prices go up even as overseas prices rule steady. Historically, the price of gold ornaments and jewels are seen escalating on a weak rupee even while the benchmark London spot prices remain unchanged.

Domestic gold hit a record high of ₹35,074 for 10 grams in August 2013, on the back of a weak rupee. The rupee had dropped to an all time low of ₹68.80 against the dollar during that time. Meanwhile, its international benchmark, London spot gold, was near $1,390 an ounce, down by more than 31 per cent from its record peak of $1,920 hit in June 2011.

Due to stable physical demand, bullion usually magnetised a premium in Indian markets against international prices, making the commodity a favourite for speculation as well. When the rupee collapsed investors, physical traders and speculators largely bought gold as a hedge against inflation. Moves in silver are normally in tandem, but not as aggressive as gold. Silver tested at a record high in the Indian market in April 2011, parallel to the increase in overseas prices.

In the meantime, when the rupee dipped to its worst in August last year, silver prices were around ₹53,200 compared with the previous quarter average of ₹41,800/kg whereas gains in the international market were lower.

Oil prices are highly correlated with currency moves as global oil trades are mostly denominated in the dollar. India meets a major part of its oil requirements through imports. Some 21 per cent of our total import bill accounts for the cost of crude oil.

If the Indian rupee weakens, the country will have to incur additional burden on the oil bills. Domestic oil companies discharge these supplementary costs in the landed oil by hiking prices domestically.

In the third quarter of 2011, Indian rupee was ₹48 versus the dollar and our benchmark Brent crude oil was around $110 a barrel. However, the domestic oil prices were held near ₹5,280 a barrel. Now, oil is trading near $102 in the international front, but the domestic currency has weakened to ₹60.50, resulting in an additional burden of around 18 per cent in the local oil prices. Apart from crude oil, another energy component natural gas is also highly correlated to the currency moves.

As international gas prices are currently trading at multi-year lows we have been saved from such an increase in domestic gas prices.

The base metals complex is the other commodity influenced by the rupee depreciation. London Metal Exchange prices are the benchmark for the non-ferrous metal complex currently. We import a large quantity of non-ferrous metals, iron, steel and their products. Meanwhile, our exports include finished goods and value added metal products.

Since we are dealing with either import or export of these goods, it leads to a corresponding price difference in the domestic metal when the rupee is volatile. We have seen a huge price difference in copper, aluminium and steel when the rupee depreciated.

Though the impact on agriculture commodities is not that severe, few value-added products which we import or export will be impacted by the currency moves. It usually weighs on the oilseed complex and cotton.

Despite India being one of the largest producers and consumers of oilseeds in the world, we meet our domestic edible oil demand through imports. Oilseed cultivation is becoming increasingly unattractive owing to low and unstable yields. Decreasing price of edible oils results in low prices for oilseeds, resulting poor production.

A balanced move in currency is essential for every growing economy.

The writer is a Senior Analyst/ Research Head at Geojit Comtrade Ltd. Views are personal

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