An ominous phase of volatility in commodities seems imminent. We are seeing price fluctuations increasing across commodities. The demand-supply estimates of key commodities have either been hazy or improperly assessed over the past year and this helped traders profit from increased volatility. The current year could well see demand drop and trap traders who are expecting a repeat of last year.
A demand drop in commodities would help importing countries control domestic inflation and manage deficits better. On the contrary, if the volatility sees even higher commodity prices in the short term, things can get out of control on the deficit and currency fronts. Higher commodity prices can spike the growth rates of those countries where inflation is already high. The currency of importing countries will also get out of control and we will see turbulence reflect in their stock markets.
India is on the cusp of this trend and what happens to commodity prices will determine the immediate future of our economy. The stock markets seem to know this and the nervousness is palpable among larger investors, big business groups and domestic institutional investors. FII’s seem to be relatively more confident of the trend moving favorably and continue to invest in the India story.