Many years ago, when I still smoked and occasionally travelled by bus, it was well established that if you lit a cigarette, the bus would come almost immediately. Indeed, sometimes this was used as a means of accelerating the arrival of the bus.
The Reserve Bank of India’s recent strong man hike in interest rates appears to have followed this rule of life, since commodity prices — one of the definitive drivers of inflation — tumbled sharply just as RBI “lit up”. Of course, the jury is still out on whether commodity prices are going to correct further or start climbing again. However, this sudden correction — if, indeed, that is all it turns out to be — has clearly shown how much speculation there was (and is?) in commodity prices.
Minus (or with limited) speculation, where will commodity prices be? Well, nobody really knows, but I have felt for a long time — and have been wandering around with a little bit of egg on my face — that $ 1,400 should certainly be a top for gold. Oil, I don’t know, although OPEC appears happy at $ 100.
I have also felt, and loudly announced, that the Australian dollar at parity with the US dollar is insane — but, hey, even today it’s holding above a key support around 1.05.
Perhaps the truth is that while the commodity bull cycle, driven to a large extent by the increasing demand from China and India, will remain in play for some more time, it may be in process of changing to a more moderate pace. My favourite reason why this will certainly happen is that at some point the big commodity buyers will learn how to play the terms-of-trade game. I mean Reliance pays the lowest prices for its purchases; there’s no reason why India and China, if they work together, should not pay the lowest prices for oil, gold and other imported commodities.
“If they work together” is, of course, the operative phrase. And while several people in the global trenches rue the fact that China is simply striding out on its own, we have to find a way to show them that working together would help both of us — perhaps, its time to make Jairam Ramesh the External Affairs minister.
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Returning to more immediate matters of the currency market, the recent blow-out has also taken its toll on the Euro, and, of course, the rupee. While I hate to say I told you so, the truth is I did — that there was a 50 per cent chance that rupee will be between 45 and 46 in May. It ain’t there yet, to be sure, but I’d guess the odds are much higher now.
As to the Euro, it certainly seems that the powers-that-be - read Germany, Germany and Germany — have recognised that a break-up of the single currency, which was all the talk six months or so ago, would be disastrous for the European experiment and for Germany itself. The market certainly appears to be respecting the ECB’s rescue packages for Greece, Ireland and, now Portugal. However, even if the rescue packages work and the governments in question are able to survive the draconian spending cuts they have to implement, the fact is that the fundamental conflict remains definitively in place!
While it was doubtless the collapse of the US sub-prime market in 2008-09 that provided the trigger for the European debt crisis, the EU had already been rendered unstable by the fact that the low interest rates that ran from 2005 to 2007, which were needed to prop up the large economies of Europe (read Germany, Germany and Germany), had created red hot growth and concurrent bubble-dom in several Euro-periphery economies.
Today, the shoe is on the other foot. With inflation rising in the large economies of Europe (ditto), interest rates need to rise sooner or later, which, of course, could be the death knell of gasping economies from Greece to Ireland and beyond.
The good news, for now, is that the ECB stayed its Germanic hand on the monetary policy knob just as commodity prices were getting their comeuppance. The new President of the ECB is Italian, although “…rather German, even Prussian” according to Das Bild, a racy, though influential German daily.
It would seem that the only long-term resolution of the Euro problem is for all of Europe to become more Germanic — a solution I had half-laughingly suggested in my column entitled, W(h)ither the Euro — a fable [Business Standard, April 2010], where Helmut Kazantakis, a Greek-German became the President of the United States of Europe, with, coincidentally, an Italian at the head of the ECB.
If this is a non-starter, it is only a matter of time before the market decides to light up another cigarette.