Asset price concerns remain as housing prices stay firm.
The political crises in West Asia and North Africa may raise the prices of crude oil and other commodities in the near term and lead to a further deterioration in inflationary situations in emerging economies, including India, the Reserve Bank of India (RBI) has said.
The crises are “not expected to directly affect India’s trade position, as these economies do not have a high share in India’s international trade,” RBI said in its report on Macroeconomic and Monetary Developments in 2010-11, which was released today. “There could, however, be significant indirect effects arising from the possible rise in the prices of oil and other commodities. Oil alone constitutes about one-third of India’s total imports,” the central bank said.
| FUTURE TENSE Movement in International & Domestic Commodity Prices | ||||
| Item | Annual Variation Mar ’11 | Mar ’11 over Dec ’10 | ||
| International | Domestic (WPI) | International | Domestic (WPI) | |
| Rice | -1.9 | 2.7 | -7.4 | -2.0 |
| Wheat | 65.7 | 0.8 | 3.3 | 0.5 |
| Maize | 82.7 | 25.5 | 16.0 | 11.8 |
| Soyabean Oil | 42.8 | 19.1 | -1.1 | 10.7 |
| Sugar | 40.6 | -7.5 | -6.2 | -1.7 |
| Cotton | 167.6 | 98.1 | 36.7 | 34.4 |
| Rubber | 63.8 | 49.1 | 19.3 | 11.6 |
| Coal | 35.6 | 15.9 | 8.2 | 15.9 |
| Petroleum | 37.0 | 6.3 | 20.7 | 0.0 |
| Iron Ore | 21.2 | 29.7 | 3.8 | 1.4 |
| Fertilisers | 28.4 | 9.4 | -1.2 | 3.1 |
| Aluminium | 15.8 | 1.8 | 8.7 | -0.8 |
| Copper | 27.3 | 0.3 | 3.9 | 1.0 |
| Gold | 27.9 | 33.4 | 2.4 | 1.3 |
| Silver | 109.6 | 68.9 | 22.4 | 14.2 |
| All figures in per cent Source: World Bank, Commerce & Industry | ||||
The crises in West Asia and North Africa began early this year, with the Jasmine Revolution in Tunisia. The mass uprising against corruption and unemployment led to the fall of the local government there. The unrest soon spread to Egypt, Libya, Bahrain, Syria, Yemen and Jordan.
The geopolitical crisis led to oil prices crossing the $100-a-barrel mark. In March, the average crude oil price stood at $114.4 per barrel for UK Brent category, and $108.6 per barrel for the Dubai Fateh variety. The Indian crude oil basket price stood at $110.4 per barrel last month.
“An analysis in the Indian context points to the likely adverse impact of rising input costs on gross domestic product,” RBI said. Growth in sectors like surface and air transport, synthetic fibre and chemicals, cotton textiles, paper products, rubber and plastic, cement and foodgrain could be hit because of the high input linkages of these sectors with oil, the central bank warned.
“Geopolitical tensions in West Asia and North Africa and the supply disruption in primary commodity producing countries suggest increasing risks to the expected moderation in inflation,” RBI said.
In the domestic market, high asset prices, triggered by rising home unit prices, remain a key concern for RBI. “Property prices continued to rise in most cities during the third quarter of 2010-11, as reflected in the Reserve Bank’s Quarterly House Price Index, which is based on data from seven cities collected by the Department of Registration and Stamps of state governments,” RBI said.
RBI also cautioned if growth in advanced economies gathered pace, investors may shift focus from emerging markets, including India, to advances economies like the US. This may lead to volatility in the domestic equities market in the near term. In the January-March period, the Bombay Stock Exchange’s benchmark Sensex had been the worst performer among major equity indices, barring Japan’s Nikkei.
On the domestic debt market, RBI said the government’s aim of fiscal consolidation may ease pressure on long-term bond yields in the government securities market. However, this would be possible only if inflationary expectations were reined in.
