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Dilemma of rising commodity prices
Tue, 25 Jan Pre-Open

FY10 was a stellar year for Indian companies. Not only had India's economy recovered considerably from the global economic slowdown, but lower commodity prices had also fattened margins. But sustaining such superior margins going forward was always going to be a tall task.

Commodity prices have zoomed in recent times and are threatening to reach levels that were seen in 2008. For starters, oil prices have touched the US$ 100 a barrel mark. World food prices have also been soaring. The rise in commodity prices could not have come at a more inopportune time. The US and Europe have not shaken off the burden of recession and higher commodity prices will only thwart growth further. The Asian economies (including India) are not in the same boat as their developed peers. But rising commodity prices are taking toll on the profitability of companies and are impacting the common man too.

Inflation has become a major problem especially in economies such as India. Food prices have remained high for some time now which has kept overall inflation too at higher levels. This has compelled the RBI to go in for rate tightening measures. Thus, Indian companies especially are faced with a double whammy of rising raw material prices and higher interest rates.

Rising oil prices are also a major concern for India. With inflation already raging high, the government is not willing to raise prices of diesel, kerosene and LPG which account for a major chunk of India's fuel consumption. This has led oil marketing companies to bleed. Moreover, the government's subsidies in this regard are putting a further strain on its already overstretched finances.

Indeed, higher commodity prices do not bode well for developed countries such as US and Europe which are yet to display any significant recovery. Nor does it augur well for emerging economies such as India which are once again likely to see some pressure on growth.

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