The Rupee and India’s Commodity Markets: Interesting Times

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Source: Platts

For those active in the Indian energy and commodity market, the past six months has not been for the faint of heart. I recently got to see this first hand while at Platts Commodity Week in Mumbai, September 2-4, 2013.

The Platts Commodity Week conference covered everything from steel and coal to liquid natural gas (LNG), oil, and petrochemicals and provided an excellent opportunity for local enterprises to see market trends and network with a global crowd. Of particular interest was how Indian companies were managing under the constraints of higher external costs and a subdued local market. In some cases it was simply to downgrade the quality of imports like coal to reduce cost. Needless to say, the mood at the event swung wildly depending upon whether the attendee worked for a company primarily in the export business or a with large offshore production compared to whether they were primarily tied to the import of raw materials, with the latter being in a decidedly poor mood.

The Rupee, already in decline, had just fallen a further 20% since June and was putting a squeeze on the firms reliant upon imports and the many Indian companies with U.S.-dollar-denominated debt.

Figure 1: Indian Rupee to U.S. Dollar Spot Exchange Rate (Data Source: Bank of England)

Figure 1 above was created in the ZEMA Suite using the Indian rupee to U.S. dollar spot exchange rate data from the Bank of England. The increasing cost of buying a U.S. dollar in Indian rupees reflects the decreasing value of the Indian rupee in the last nine months.

The current state of the economy has been a tough pill for the locals to swallow coming so quickly on the heels of the hype surrounding the “Indian Miracle”; however, the general sentiment at the event was that this current issue was part of a cyclical event and not part of a longer term downturn, like the one currently being experienced in Europe.

The feeling among the attendees and presenters at the event was that if the government can push through some much needed economic reforms and the Rupee stabilizes, then foreign investment will begin to pour back in.

A key takeaway is that there will certainly be tremendous investment in energy infrastructure in India over the midterm to allow the country to take advantage of greater access to gas, both internally and from abroad. Also, there will be continued growth in refining and the production of petrochemicals in spite of what appears to be flattening demand and underutilization of the plants that already exist. If the government can follow through on regulatory reforms and get its crippling budget deficits under control – and stability in the mid-east dampens the price of oil – things may soon begin to look up for India.

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