Weak rupee has put importers and exporters in a tough spot

It has been a tough time for commodities traders in our country as the weak rupee has spoiled the mood of market participants. Importers and exporters of commodities are going through difficult times because of the currency.

India is an importer of pulses, edible oils and a number of soft commodities which have become more expensive with the weakening of the rupee. While on one hand prices of many essential and other agriculture commodities are going down due to excellent winter crop in our country, the prices of pulses and edible oils that we are importing have become more expensive due to the weakness in the rupee.

The weak currency has partly offset the benefits which we could have reaped from lower prices in the international markets. The best example is palm oil. Indian palm oil moved up from Rs 455 per 10 kg to Rs 500 per 10 kg. On the other hand, prices remained range bound to weak in Malaysia during the same time.

In commodities futures trading, traders have taken a serious hit because of the rupee. Intra-day traders in commodities futures trade for 1-4% upside or downside in the market. If in the morning, traders develop a view that gold prices should go down by 2% and during the same day if the rupee weakens by 2%, then his view goes wrong and vice-versa.

So more than commodities, traders' view should go right on currencies in order to maximise their profits. It becomes very difficult to get the view right on commodities and currencies to get optimum profit.

It is same in case of a lot of agricultural commodities. If the rupee depreciates sharply during the day, then the parity for exports and imports changes immediately, resulting in unnecessary volatility in prices during the day. In the day, prices of commodities we import tend to move up immediately with a spike in rupee even if price within the country where it is originally produced is declining. For example, even if prices of soya oil are declining in Argentina, prices of soya oil in India on NCDEX moves up, making it very difficult for day traders.

Exporters, importers and commodity traders need to hedge their rupee risk on the currency futures bourses or with banks in this challenging environment. If they don't do that, it can have serious impact on their profitability . Even for a trader, if he is going short on gold futures in order to make optimum profit in a scenario where the rupee is weakening, he has to go long on the USD/INR pair.

A weak rupee breeds inflation and a deprecating rupee makes imports of commodities more expensive. Since the last four years, developed economies have deliberately devalued their currencies and this practice continues even today. By doing so they have imposed currency wars on emerging markets where inflation has tarnished their growth and volatility and weakness in currencies is creating all sorts of problems.

Commodities in the international markets are dollar denominated whereas in India it is rupee denominated; this rampant weakness in rupee will not do any good for commodities in the long term. Even in a scenario where commodity prices crash significantly due to slowdown in the Chinese economy, India will not be able to reap the benefits of the same due to a weak rupee.

There is a need to lower commodity prices to grow, and due to weakness in the rupee, this seems very difficult.

KUNAL SHAH,
Head, Commodities Research, Nirmal Bang Commodities