Silver lining of the Greek and China crisis: Oil capitulation (Column: Currency Corner)

Indian bears are pressing the sell button hard taking cues from the Chinese stock market sell-off and the possible contagion effects of a Grexit on peripheral Europe. 

Yes, the China fall is extremely worrying. This is not only because of the steepness of the fall and the scary margin debt levels the rally had been built on but the fact that Beijing has failed to stem this capitulation. The belief that the Chinese authorities has a stronghold on the domestic economy – from inflation to property markets to equity and FX markets – has been shattered. The so called “Beijing put” has vanished. 

Copper is a commodity known to have a PhD in economics. The metal, which has in the past predicted many economic booms and busts, is on the verge of a major technical breakdown. There certainly seems to be more global economic pain ahead.

But within this gloomy context (at least from India’s perspective), a commodity sell off has been a net positive. Oil prices have dropped by more than 15 percent with both crude benchmarks – WTI and Brent – showing no signs of a trend reversal. Add to this that the market will soon start focusing on the potential Iran deal breakthrough. When the US/European sanctions on Iran crude are lifted, Iran can and will restore its production of one million barrels per day  fairly quickly. Iran’s oil minister has told OPEC ministers that this supply can hit the market in less than six months.

As things stand now, there is a low probability that Fed chief Janet Yellen will raise rates in September. The US federal funds rate futures market certainly believes that is the case. Considering that a September liftoff was the base case scenario just a few weeks back, the delay in monetary tightening will support emerging markets ex-China. 

The above two factors – delay in US rate hike and the fall in oil prices – should finally encourage our conservative “star” central banker to step up the interest rate easing cycle in India. India badly needs a considerably large fall in capital to revive our investment cycle. 

The RBI has been behind the curve and Governor Raghuram Rajan must act urgently. This is not the time to be talking about global coordinated monetary policy and “depression like economic conditions”. 

    

(Vatsal Srivastava is consulting editor with IANS. The views expressed are personal. He can be reached at vatsal.sriv@gmail.com)

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