Spike in gold, crude prices adds to rupee woes
Sep 01 2013 , Mumbai
If sustained, this can have a major impact on the government finances, which are already under pressure due to slowing economic growth, plunging rupee and rising expenses.
Adding to the worry is a forecast by French bank SocGen, which predicted that oil price can rise to $150 a barrel if the conflict in Syria escalates, resulting in significant disruption in Iraq or elsewhere. To put this in perspective, India imports three-fourths of its oil requirement and is fourth largest energy consumer, after the US, China and Russia.
With the rupee hitting a new low against the US dollar, the situation looks grim. Though data suggest a decline in India’s monthly oil imports, the August data may show higher oil imports, thanks to a falling rupee and rising crude price. India imported oil worth $14.1 billion in April, $15 billion in May, $12.8 billion in June and $12.7 billion in July. Last July, the oil bill stood at $13.8 billion.
Despite the government imposing curbs on gold imports, it seems gold consumption continued to grow, weakening the country’s forex reserve. Gold is the second biggest contributor to the import bill. India’s gold and silver imports stood at $2.9 billion in July compared with $2.45 billion in June. However, this came down from $4.4 billion in July 2012.
Gold price touched $1,420 an ounce on Friday, a three-and-a-half month high, reversing the downward trend in prices for most of this year. Gold price fell to $1,180.50 in June, the lowest level in nearly three years. From that level, gold price has risen over 20 per cent, though year to date it is still 15 per cent down.
“Geo-political tensions in Syria have led to a spike in oil and gold prices compounding India’s weak rupee (down 8.6 per cent last week),” Jyotivardhan Jaipuria and Anand Kumar of BankofAmerica-Merrill Lynch said in a note, adding that this (spike) may be shortlived.
In a note, Credit Suisse analysts led by Ric Deverell outlined three major reasons for the rally in gold since early August.
Deverell attributed it to instability in emerging markets, which was evident first in rates, and more recently and starkly in another lurch lower in the currencies of three key gold-buying countries – India, Turkey and Thailand.
Secondly, the worsening geopolitical unrest in West Asia (Egypt, Syria) and the potential knockon effects on Iran, Saudi Arabia and Turkey has resulted in a rise in the prices of Brent crude and gold.
Thirdly, growing uncertainty (or less conviction) about the US Fed tapering beginning in September, particularly since the poor new home sales and durable goods order data released last week, and increased attention to the US debt ceiling (due to be hit again in October) has also impact gold price.
This has resulted in, according to Credit Suisse, strong physical demand across West Asia, the Indian subcontinent and Southeast Asia. “Although attempts by the government and the Reserve Bank of India to talk down gold buying and a further increase in import duties to 10 per cent have had a dampening effect on imports through official channels, we think high local premiums (still reported to be in the $25 to $30 per oz range) and the ongoing slump in the rupee are likely to be incentivising unofficial import trade,” they said.
The big question now is, can the rally in gold price be sustained? “In our view, the emerging market selloff is now largely ‘in’ the gold price, as is a readjustment of expectations regarding tapering (note that our economists still expect the Fed to reduce the pace of QE by $20 billion a month at its September meeting). Further sizeable short covering in gold is unlikely, in our view, unless the price breaks above the early May high of $1,488 and then the $1,500 level. In our assessment that would require further substantial deterioration in the security situation in West Asia,” Credit Suisse said.
As for crude prices, Credit Suisse expects Brent oil price to rally beyond $110 a barrel on the likely prolonged absence of more than 1.0 million barrels per day (Mb/d) of Libyan oil exports, and secondly, the possibility of an imminent escalation in the Syrian conflict.
Where does India figure in all this?
Crude and gold account for almost 40 per cent of our imports and the 20 per cent decline in rupee versus the US dollar since May has compounded matters for India.
In dollar terms oil imports almost doubled in dollar terms since FY08 while gold imports have grown three-fold in dollar terms.
As Morgan Stanley pointed out in a note, since 2007, India’s current account deficit has exploded from $8 billion to $90 billion, the highest total in the emerging world. It is now equal to 5 per cent of GDP, a level twice what academic studies suggest is sustainable. India’s fundamental weaknesses are unusual in that the current account is rising despite slowing growth, which normally should cut the import bill.
Other than Indian households’ weakness for gold, India’s problem is peculiar as regulatory tangles force the country to import iron ore and coal, even though it has large reserves of these commodities.
BankofAmerica-Merrill Lynch’s Jaipuria and Kumar said equity investors have not yet panicked in India. “One key risk for market is that FII holding at 21 per cent (45 per cent of free float) is close to an all-time high. India remains vulnerable to any global emerging markets sell-off,” they added.
The bellwether Sensex jumped 624 points in the last two sessions of last week, after falling below 18,000 on Wednesday.
Looking at past instances of sharp rupee depreciation of over 15 per cent, the market has fallen in all the three instances on an average 21.5 per cent (ranging from 4.5 per cent to 47 per cent). “Interestingly, the market recovered practically the entire loss three months later on all the three occasions,” they wrote.
Maybe there is some hope left. zz