Liquidity has been a problem for banks throughout this year and the RBI has used various tools to maintain equilibrium. It has conducted aggressive Open Market Operations (OMOs) to provide liquidity as well as upped the LAF window for repo transactions. Also, the statutory liquidity ratio (SLR) has been reduced by 1% point. But the RBI has not relented on lowering the cash reserve ratio (CRR), which would have brought in around Rs 50,000 crore into the system. How do the constituents of the system stack up in this game?
The RBI, on an average, has provided around Rs 50,000 crore of repo money on a daily basis to banks. This number averaged Rs 85,000 crore since September. The actual repo cost to banks between April 1 and February 17 was Rs 1,925 crore. The RBI simply had to re-circulate the money that was provided to banks when required. Or more easily, it could have used the CRR balances with it.
OMOs so far this year were Rs 67,000 crore. Here, basically the RBI purchased securities and gave banks cash which they could use. Assuming that the average return on these securities is 7.5%, the RBI would now be paid interest by the government of nearly Rs 5,025 crore. Therefore, on the whole, the RBI is better-off by around Rs 7,000 crore. It has printed some additional currency, which is the only cost that has been incurred for this activity.
What about banks? Given the tight liquidity conditions, they had to bear the cost of repos which was Rs 1,925 crore. But in the OMOs, they parted with Rs 67,000 crore of securities and got cash for it. They could either reinvest the proceeds in GSecs or use it for commercial purposes. Reinvesting in GSecs would have given them, maybe, just a better return of 50 bps, given that rates have moved up during this year or Rs 335 crore (0.5% of Rs 67,000 crore). The alternative would be to channelise these resources into commercial lending, where the rate would be a minimum of 12% and they would have received at least 4.5% more than on GSecs. This would mean a gain of around Rs 3,015 crore. As money is fungible, one cannot really figure out which resources were channelised to which use.
Furthermore, the investment deposit ratio has come down by roughly 1% after the SLR was lowered. Essentially, around Rs 5,000 crore would have been released and assuming that it now earned the commercial rate, banks would have gained another Rs 225 core (4.5% of Rs 5,000 crore). Now, in net terms, the banks could have actually been better off by around Rs 1,300 crore (Rs 3,240 crore minus Rs 1,925 crore). Here, we are assuming that the repo money was not churned at 12%! If this was done, then banks could have earned higher returns, which the RBI has warned should not be happening.
The government is in an unchanged position because the RBI has dexterously steered the borrowing programme. The OMOs do not change the government’s stance as only the holder of the paper has changed. The cost to the government on account of change in ownership is nil as its own account is also not affected in any way by these transactions.
The borrowers would complain since they continued to pay higher interest rates, but then they were paying the price of capital as theory says that tight liquidity must get reflected in the cost of funds which went up, guided as it was by the RBI.
The alternative, as mentioned earlier, was to tinker with the CRR. A 1% reduction in CRR, would have released Rs 50,000 crore into the system. Here, the RBI would have eschewed the cost of printing more currency and handing it over to the banks. This money is anyway deposit money kept by the public which would have come back to banks. If this money were deployed commercially, banks would have earned up to Rs 6,000 crore on it, i.e. 12% on Rs 50,000 crore depending on what part went into commercial lending or GSecs (which would have earned say 8%).
How can all this be summed? It is a true Pareto optimal situation where all parties have gained or no one has lost. To borrow a simile from the tennis court, it is more like game, set and match to the RBI.
Wednesday, February 23, 2011
A Price Index to Hide Inflation: Financial Express 19th February 2011
The new CPI is another addition to the series of changes one is witnessing in the data sets on the Indian economy. We have had a new WPI series followed by GDP, which chose 2004-05 as base year. The IIP is also being reworked on this basis, which would harmonise the base years for most critical economic variables. This move is definitely pragmatic as comparisons are possible across indicators without the limitation of having to qualify the base years.
The new CPI in its new form with 2010 as base looks at urban, rural and a combination of the two, and would probably replace the current sets on industrial workers, agricultural labourers and rural labourers, although it has been stated that the status quo would not change right now. While it may still be difficult to map the same, it could be assumed that there is some correlation between these groups. However, the major issue here is the choice of base year.
This index uses 2010 as the base year. Is it a fair assumption? Usually a base year should be a normal year where there was normal economic activity with few extraneous distortions. But, looking at 2010, it would probably not fit the billing. This was probably one of the most inflationary periods of our lives. Further, the global economy is still recovering from the financial crisis, which means that activity was not normal. Therefore, there will be a wrong start at the beginning of the index.
A high base year for the CPI in 2010 means that the future rates of changes in prices will tend to be lower as we move along. It is not surprising that the rates shown for January are of a lower order of 7% for rural folks, 4% for urban and 6% for all. The number of 4% will definitely not go down well with all those who will finally (when that for industrial workers is replaced) have their salaries adjusted for this kind of inflation, since the actual cost of living has gone up more significantly than this number suggests. In fact, looking at this number, one will get an impression that inflation was never a major issue to begin with, as January was the time when we had the highest number in food inflation. The WPI monthly index showed price increase of over 15%, while the CPI tells us that it was not really significant. Clearly, there is something wrong in the representation of prices.
A serious anomaly is that the base year has been taken as 2010, even though the weights are based on consumption patterns as per the NSS study for 2004-05. This being the case, they could have used 2004-05 as the base year rather than 2010.
Further, the new CPI has changed the weights of several components of the index quite drastically. Food items have a lower weight for urban folk when compared to the existing index for industrial workers by around 11.5 percentage points. The weight of housing has been increased by around 7 percentage points. What this does is that it would keep understating the price increase, since the category of housing is unlikely to show monthly changes, as such revisions take place only periodically. But then there could always be discussion on weights to other components also such as transport, clothing etc. What is the solution?
To strike a balance, the government should focus on bringing out a food price index and simultaneously revealing how this moves. The problem with having a composite consumption index is that these weights differ for different segments of society. Just as rural people spend more on food, so do the low-income earners in urban areas, who probably do not spend on other items like housing or transportation.
Finally, one needs to ask as to why at all are we having one more index on prices. If it will replace other indices, then it is okay. If it is to run parallel, then it will add to the confusion as each index can tell a different story. Already there is an anomaly between CPI and WPI numbers and one is questioning as to which one is right. Now with this new index having a statistical bias towards showing better numbers, we will get another picture. The existence of three indices here will only add to the plethora of presentations of inflation numbers—we already have week on week, month on month, year on year, average till date for the WPI and various CPIs. The same will hold for these new three CPIs.
While more is merrier in general, the tricky question is, which one will the policy makers be looking at?
The new CPI in its new form with 2010 as base looks at urban, rural and a combination of the two, and would probably replace the current sets on industrial workers, agricultural labourers and rural labourers, although it has been stated that the status quo would not change right now. While it may still be difficult to map the same, it could be assumed that there is some correlation between these groups. However, the major issue here is the choice of base year.
This index uses 2010 as the base year. Is it a fair assumption? Usually a base year should be a normal year where there was normal economic activity with few extraneous distortions. But, looking at 2010, it would probably not fit the billing. This was probably one of the most inflationary periods of our lives. Further, the global economy is still recovering from the financial crisis, which means that activity was not normal. Therefore, there will be a wrong start at the beginning of the index.
A high base year for the CPI in 2010 means that the future rates of changes in prices will tend to be lower as we move along. It is not surprising that the rates shown for January are of a lower order of 7% for rural folks, 4% for urban and 6% for all. The number of 4% will definitely not go down well with all those who will finally (when that for industrial workers is replaced) have their salaries adjusted for this kind of inflation, since the actual cost of living has gone up more significantly than this number suggests. In fact, looking at this number, one will get an impression that inflation was never a major issue to begin with, as January was the time when we had the highest number in food inflation. The WPI monthly index showed price increase of over 15%, while the CPI tells us that it was not really significant. Clearly, there is something wrong in the representation of prices.
A serious anomaly is that the base year has been taken as 2010, even though the weights are based on consumption patterns as per the NSS study for 2004-05. This being the case, they could have used 2004-05 as the base year rather than 2010.
Further, the new CPI has changed the weights of several components of the index quite drastically. Food items have a lower weight for urban folk when compared to the existing index for industrial workers by around 11.5 percentage points. The weight of housing has been increased by around 7 percentage points. What this does is that it would keep understating the price increase, since the category of housing is unlikely to show monthly changes, as such revisions take place only periodically. But then there could always be discussion on weights to other components also such as transport, clothing etc. What is the solution?
To strike a balance, the government should focus on bringing out a food price index and simultaneously revealing how this moves. The problem with having a composite consumption index is that these weights differ for different segments of society. Just as rural people spend more on food, so do the low-income earners in urban areas, who probably do not spend on other items like housing or transportation.
Finally, one needs to ask as to why at all are we having one more index on prices. If it will replace other indices, then it is okay. If it is to run parallel, then it will add to the confusion as each index can tell a different story. Already there is an anomaly between CPI and WPI numbers and one is questioning as to which one is right. Now with this new index having a statistical bias towards showing better numbers, we will get another picture. The existence of three indices here will only add to the plethora of presentations of inflation numbers—we already have week on week, month on month, year on year, average till date for the WPI and various CPIs. The same will hold for these new three CPIs.
While more is merrier in general, the tricky question is, which one will the policy makers be looking at?
Room for manoeuvre: Editorial in Financial express, 8th February 2011
Given the revisions made by the CSO in the GDP numbers for FY10, which made things look better, one would tend to look at the quick estimates of FY11 with a bit of scepticism. However, since it is the official stance, one must accept the numbers and see what they tell us. Growth of 8.6% for this year is not really off the mark, notwithstanding the hardships that we have been through in the form of high inflation and interest rates. Two of these numbers stand out. The first is the growth in the manufacturing sector, which is 8.8%. This is significant because while growth up to November has been buoyant, the base year effect was to come in from December onwards and drag down the number as IIP growth had averaged 20% in each of the last four months of FY10. The fact that we still are clocking high growth means that industry is doing well. The second is the lower growth of the community and social services at 5.7% as against 11.8% last year. This officially confirms that the fiscal stimulus has slowed down, though admittedly this is what the estimates for FY10 had also said, which were reversed a few days back to indicate that the stimulus continued in FY10. The other numbers are more on expected lines, which is definitely comforting.
Against this background, two issues are provoked—the response of fiscal and monetary policy. With the Budget coming up, this number will provide solace to the government insofar as it does not have to work on the basis of a low growth. Therefore, the stimulus factor will not be high on the agenda, and it can carry on with business as usual while focusing on other aspects such as inflation. As far as RBI is concerned, it is slightly trickier. Its stance that the series of interest rate hikes would not really impact growth stands vindicated this time with this high growth rate number. It could therefore go ahead and increase rates one more in March in case inflation does not slow down or come within its target rate of 7%. But a deeper thought has to be given to whether or not there is a point of inflection where industry will respond to these rate hikes. Already we have seen a slight dip in gross fixed capital formation from 32% to 31.6%, which may not be significant today but could turn ugly in future. Hence, while there is solace that growth has not been impacted perversely by the interest rate hikes, one has to be more watchful in FY12 where the overall global environment may not be congenial—with crude prices and metals showing upward tendencies. We should now begin to see the economy and the policy options in a different light and not have static expectations of economic responses, as it may just mean stretching our good luck too far.
Against this background, two issues are provoked—the response of fiscal and monetary policy. With the Budget coming up, this number will provide solace to the government insofar as it does not have to work on the basis of a low growth. Therefore, the stimulus factor will not be high on the agenda, and it can carry on with business as usual while focusing on other aspects such as inflation. As far as RBI is concerned, it is slightly trickier. Its stance that the series of interest rate hikes would not really impact growth stands vindicated this time with this high growth rate number. It could therefore go ahead and increase rates one more in March in case inflation does not slow down or come within its target rate of 7%. But a deeper thought has to be given to whether or not there is a point of inflection where industry will respond to these rate hikes. Already we have seen a slight dip in gross fixed capital formation from 32% to 31.6%, which may not be significant today but could turn ugly in future. Hence, while there is solace that growth has not been impacted perversely by the interest rate hikes, one has to be more watchful in FY12 where the overall global environment may not be congenial—with crude prices and metals showing upward tendencies. We should now begin to see the economy and the policy options in a different light and not have static expectations of economic responses, as it may just mean stretching our good luck too far.
"Is credit contraction a good Idea" Business Standard: 2nd February 2011
Is credit contraction a good idea?
Monetary tightening has done little to curb inflation and will hurt investment, but the credit surge suggests that inflation is demand-driven, so it’s better to have lower near-term growth than a hard landing later.
When monetary tightening is not really achieving the objective of lowering food inflation, it deserves to be reviewed given its deeper impact on the investment climate
The focus of the Reserve Bank of India ) so far has been to use interest rates as a tool to control growth in credit which has been steady this year. The idea, ostensibly, is to reduce demand-pull inflationary forces and rein in inflation. There are two thoughts here. First, whether credit contraction will deliver the result in terms of combating inflation. Second, whether this act, or rather series of acts, will affect the economy adversely in some other way.
The concern is palpable on primary product prices that have been fraught with output failure in non-conventional articles (beyond kharif which is doing well) like fruit, vegetables, dairy and meat products. Here, interest rates or liquidity do not really matter because raising repo rates cannot augment supplies and we will continue to pay higher prices until such time as supplies come in. There is little evidence of hoarding on the back of bank lending. Therefore, credit contraction will have a limited impact on inflation and a further tightening of strings will just not work.
To be charitable to economic theory, it may be said that credit contraction through higher rates will impact only demand-pull inflationary forces to the extent that they exist in our system. This will mean core inflation or “non-food, non-fuel, non-LME” inflation. But, most certainly it will not really achieve the desired objective of controlling the present issue of consumer inflation. The RBI may end up saying that the policy has worked, but really the retail prices of food would not be affected. The consumer price index (CPI) will continue to reflect the ground reality since the lower wholesale price index (WPI), due to declining prices of machinery or chemicals, does not affect us.
If this were so, the next question to be addressed is whether this move is a good idea especially since this measure will not be bringing down food prices. India is at a critical stage of growth where the push has been given during the global crisis years and the challenge is to maintain the momentum. Globally, central banks are easing interest rates and liquidity in a bid to encourage investment and consumption. Admittedly, monetary policy should be driven by domestic and not global factors, but if the objective of inflation is not really being achieved, should we be coming in the way of growth by tightening liquidity?
We have the curious combination of a high fiscal deficit and government borrowing, lower government expenditure and higher holdings of cash obtained through the 3G spectrum auctions, low growth in deposits, higher hoarding of currency by the public, and an industrial sector that is yo-yoing in terms of growth. Liquidity is an issue that is being aggrandised as banks are desperately borrowing Rs 1 lakh crore on a daily basis from the RBI. The wisdom of monetary tightening has to be questioned.
With the government having an edge when it comes to attracting banks in terms of investments in its debt, the private sector would be at a disadvantage with a shortage of funds and an increasing cost of credit. This will impact medium-term growth prospects especially when we need to have large quantities of investment in both industry and infrastructure. In fact, talking of infrastructure projects, those that are being undertaken will have their cash flows jeopardised since revenue streams are fixed over the tenure while costs would now be increasing due to higher interest payments. Therefore, there is a possibility of some adverse consequences here. Simultaneously, consumer spending on housing and automobiles will slow, thus weakening the backward linkages with industries that have been growth drivers in the past.
Keeping such a situation in mind, it does appear that when monetary tightening is not really achieving the objective of lowering food inflation, it deserves to be reviewed given its deeper impact on the investment climate. The RBI has also mentioned indirectly that it can do little more to ease liquidity with the Statutory Liquidity Ratio and Open Market Operations measures having limited impact. Under these conditions, it may be advisable to leave liquidity alone for sometime.
Monetary tightening has done little to curb inflation and will hurt investment, but the credit surge suggests that inflation is demand-driven, so it’s better to have lower near-term growth than a hard landing later.
When monetary tightening is not really achieving the objective of lowering food inflation, it deserves to be reviewed given its deeper impact on the investment climate
The focus of the Reserve Bank of India ) so far has been to use interest rates as a tool to control growth in credit which has been steady this year. The idea, ostensibly, is to reduce demand-pull inflationary forces and rein in inflation. There are two thoughts here. First, whether credit contraction will deliver the result in terms of combating inflation. Second, whether this act, or rather series of acts, will affect the economy adversely in some other way.
The concern is palpable on primary product prices that have been fraught with output failure in non-conventional articles (beyond kharif which is doing well) like fruit, vegetables, dairy and meat products. Here, interest rates or liquidity do not really matter because raising repo rates cannot augment supplies and we will continue to pay higher prices until such time as supplies come in. There is little evidence of hoarding on the back of bank lending. Therefore, credit contraction will have a limited impact on inflation and a further tightening of strings will just not work.
To be charitable to economic theory, it may be said that credit contraction through higher rates will impact only demand-pull inflationary forces to the extent that they exist in our system. This will mean core inflation or “non-food, non-fuel, non-LME” inflation. But, most certainly it will not really achieve the desired objective of controlling the present issue of consumer inflation. The RBI may end up saying that the policy has worked, but really the retail prices of food would not be affected. The consumer price index (CPI) will continue to reflect the ground reality since the lower wholesale price index (WPI), due to declining prices of machinery or chemicals, does not affect us.
If this were so, the next question to be addressed is whether this move is a good idea especially since this measure will not be bringing down food prices. India is at a critical stage of growth where the push has been given during the global crisis years and the challenge is to maintain the momentum. Globally, central banks are easing interest rates and liquidity in a bid to encourage investment and consumption. Admittedly, monetary policy should be driven by domestic and not global factors, but if the objective of inflation is not really being achieved, should we be coming in the way of growth by tightening liquidity?
We have the curious combination of a high fiscal deficit and government borrowing, lower government expenditure and higher holdings of cash obtained through the 3G spectrum auctions, low growth in deposits, higher hoarding of currency by the public, and an industrial sector that is yo-yoing in terms of growth. Liquidity is an issue that is being aggrandised as banks are desperately borrowing Rs 1 lakh crore on a daily basis from the RBI. The wisdom of monetary tightening has to be questioned.
With the government having an edge when it comes to attracting banks in terms of investments in its debt, the private sector would be at a disadvantage with a shortage of funds and an increasing cost of credit. This will impact medium-term growth prospects especially when we need to have large quantities of investment in both industry and infrastructure. In fact, talking of infrastructure projects, those that are being undertaken will have their cash flows jeopardised since revenue streams are fixed over the tenure while costs would now be increasing due to higher interest payments. Therefore, there is a possibility of some adverse consequences here. Simultaneously, consumer spending on housing and automobiles will slow, thus weakening the backward linkages with industries that have been growth drivers in the past.
Keeping such a situation in mind, it does appear that when monetary tightening is not really achieving the objective of lowering food inflation, it deserves to be reviewed given its deeper impact on the investment climate. The RBI has also mentioned indirectly that it can do little more to ease liquidity with the Statutory Liquidity Ratio and Open Market Operations measures having limited impact. Under these conditions, it may be advisable to leave liquidity alone for sometime.
The Commodity Cycle will stay up: Business Standard: 31st January 20111
Global economic recovery and surging demand as a result of it presage higher prices all round
The commodity cycle in 2010 has been interesting, defying as it does movements in fundamentals at times. Prices have tended to increase over the year across all categories at a time when the world economy is just about recovering — the International Monetary Fund (IMF) projects developed countries to grow by 2.7 per cent in 2010 and emerging markets by 7.1 per cent to bring a cumulative growth of 4.8 per cent for the global economy.
Two issues flow from this. One, if the present increase is being brought about by emerging markets, then when the developed economies grow, there will be a further strain on prices. Two, even farm products have shown an increase in prices when there was no apparent crop failure.
The accompanying table gives information on global price movements for various commodities over the 12 months to November 2010. There are different stories emerging from various commodity groups. Both gold and silver moved up but the increase in gold price was moderate compared with silver. More interestingly, the traditional link between dollar movements and the price of gold was severed. The dollar movement was quite idiosyncratic — strengthening vis-à-vis the euro when the Greek crisis unfolded and declining subsequently. But bullion held on quite well and became the preferred asset class with investors finding it a safe haven. Silver gained further as investors in the futures markets took greater exposures. Further, the physical demand for silver increased thus putting pressure on the price. The coefficient of correlation between gold and silver prices remained high at 0.93. However, the same between gold and the dollar was -0.1065 against a long-term relation of -0.95. The fact that currencies are volatile and that inflation is a concern given the liberal monetary policies being pursued has made bullion a safe bet.
Non-precious metals follow the rules of demand and supply. Demand is normally associated with the upswing in the economic cycle. Has the cycle turned? One is not sure as central banks are still pursuing liberal monetary policies to provide liquidity and keep rates low so that the recovery can follow. Metal prices declined in the middle of the year at the time of the Greek crisis and then moved up.
Crude oil has shown an increase on a point to point basis, though there were phases when the price remained at lower levels. The price rise was also sharp in euro terms thus challenging the argument that prices were up only due to the weak dollar. Quite clearly, higher demand as well as the seasonal winter effect has fuelled this price increase.
Agriculture has been a curious case because despite sanguine projections for most crops, with minor distortions coming in wheat (Russia), prices have increased. USDA data shows higher production levels for rice, oilseeds, oils, cotton and sugar. Yet, prices have shown an upward tendency. This is a concern because it shows that overall farm growth has not kept pace with demand, so prices are being dragged upwards. This is a kind of a wake-up call across the world to bring about the necessary farm improvements as demand would tend to grow at a steady rate and has to be met with enhanced supplies. In fact, in several developing countries like India, which are witnessing high growth, lower levels of deprivation have increased demand for food products and higher growth in future will bring more people into the consumption stream which will put further pressure on prices.
2010 has quite clearly been a boom time for commodities where rising prices have delivered good returns to investors, even though consumers, both at the retail and industry level, paid more for their products. Looking ahead in 2011, growth should pick up in developed countries, which means that demand for non-precious metals will remain bullish unless there is a downward curve for the emerging markets, which looks unlikely because consolidation is in place. Bullion will be a favourite as currencies remain unstable and central banks pursue easy money policies. One is still talking of QE3, which means that interest rates will remain low and funds will flow to the emerging markets, and bullion will draw the benefits of being a safe anchor. Crude price will depend on OPEC in general, as demand will remain steady. With the dollar-euro struggle to persist, crude will remain stable in the range of $80 to $100 a barrel. Farm products will continue to be driven by the major producers and weather conditions in India, the US, Brazil, Russia and China in particular will swing the direction. Given the maintenance of income growth, a downward movement is unlikely and a gradual increase is possible. In short, looked at from any way, we will remain up on the commodity cycle in 2011. That is good news for investors.
The commodity cycle in 2010 has been interesting, defying as it does movements in fundamentals at times. Prices have tended to increase over the year across all categories at a time when the world economy is just about recovering — the International Monetary Fund (IMF) projects developed countries to grow by 2.7 per cent in 2010 and emerging markets by 7.1 per cent to bring a cumulative growth of 4.8 per cent for the global economy.
Two issues flow from this. One, if the present increase is being brought about by emerging markets, then when the developed economies grow, there will be a further strain on prices. Two, even farm products have shown an increase in prices when there was no apparent crop failure.
The accompanying table gives information on global price movements for various commodities over the 12 months to November 2010. There are different stories emerging from various commodity groups. Both gold and silver moved up but the increase in gold price was moderate compared with silver. More interestingly, the traditional link between dollar movements and the price of gold was severed. The dollar movement was quite idiosyncratic — strengthening vis-à-vis the euro when the Greek crisis unfolded and declining subsequently. But bullion held on quite well and became the preferred asset class with investors finding it a safe haven. Silver gained further as investors in the futures markets took greater exposures. Further, the physical demand for silver increased thus putting pressure on the price. The coefficient of correlation between gold and silver prices remained high at 0.93. However, the same between gold and the dollar was -0.1065 against a long-term relation of -0.95. The fact that currencies are volatile and that inflation is a concern given the liberal monetary policies being pursued has made bullion a safe bet.
Non-precious metals follow the rules of demand and supply. Demand is normally associated with the upswing in the economic cycle. Has the cycle turned? One is not sure as central banks are still pursuing liberal monetary policies to provide liquidity and keep rates low so that the recovery can follow. Metal prices declined in the middle of the year at the time of the Greek crisis and then moved up.
Crude oil has shown an increase on a point to point basis, though there were phases when the price remained at lower levels. The price rise was also sharp in euro terms thus challenging the argument that prices were up only due to the weak dollar. Quite clearly, higher demand as well as the seasonal winter effect has fuelled this price increase.
Agriculture has been a curious case because despite sanguine projections for most crops, with minor distortions coming in wheat (Russia), prices have increased. USDA data shows higher production levels for rice, oilseeds, oils, cotton and sugar. Yet, prices have shown an upward tendency. This is a concern because it shows that overall farm growth has not kept pace with demand, so prices are being dragged upwards. This is a kind of a wake-up call across the world to bring about the necessary farm improvements as demand would tend to grow at a steady rate and has to be met with enhanced supplies. In fact, in several developing countries like India, which are witnessing high growth, lower levels of deprivation have increased demand for food products and higher growth in future will bring more people into the consumption stream which will put further pressure on prices.
2010 has quite clearly been a boom time for commodities where rising prices have delivered good returns to investors, even though consumers, both at the retail and industry level, paid more for their products. Looking ahead in 2011, growth should pick up in developed countries, which means that demand for non-precious metals will remain bullish unless there is a downward curve for the emerging markets, which looks unlikely because consolidation is in place. Bullion will be a favourite as currencies remain unstable and central banks pursue easy money policies. One is still talking of QE3, which means that interest rates will remain low and funds will flow to the emerging markets, and bullion will draw the benefits of being a safe anchor. Crude price will depend on OPEC in general, as demand will remain steady. With the dollar-euro struggle to persist, crude will remain stable in the range of $80 to $100 a barrel. Farm products will continue to be driven by the major producers and weather conditions in India, the US, Brazil, Russia and China in particular will swing the direction. Given the maintenance of income growth, a downward movement is unlikely and a gradual increase is possible. In short, looked at from any way, we will remain up on the commodity cycle in 2011. That is good news for investors.
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