Currency effect on commodity prices

Gold, crude oil and most other globally traded commodities are priced in US dollars, wherever in the world they are bought. India imports much of what it consumes in these commodities.

So an Indian buyer's rupee cost depends on two things, not one: the dollar price of the commodity, and the rupee-dollar exchange rate. If the rupee weakens against the dollar, the same dollar price costs more rupees. If the rupee strengthens, it costs fewer.

This means a commodity's futures price in India can move even on a day when nothing happens to its global dollar price at all — because the rupee moved instead.

The workbook states the relationship directly: when a country's currency appreciates against the USD, the commodity becomes cheaper in that country; when it depreciates, the commodity becomes costlier. A depreciating domestic currency makes imports costlier because it raises the INR price of USD-denominated internationally traded commodities, and this is reflected in futures prices too, since domestic prices of internationally traded commodities already build in the exchange rate.

The same mechanism resurfaces from a different angle in the chapter's interest-rate discussion: one of the four channels by which high interest rates reduce commodity prices is that higher rates tend to appreciate the domestic currency, which reduces the price of internationally traded commodities in domestic terms.

As an illustration of the arithmetic (not a workbook figure): a commodity priced at USD 100 a tonne costs about Rs 8,300 at a rupee rate of Rs 83/USD, and about Rs 8,700 at Rs 87/USD — a nearly 5% rise in the rupee price with the dollar price completely unchanged.

A Gujarat-based edible oil refiner imports crude palm oil priced at USD 900 per tonne. On 1 April, with the rupee at Rs 83.20 per dollar, the landed cost before duties works out to roughly Rs 74,880 per tonne.

By 1 July the global dollar price has not moved at all — still USD 900 — but the rupee has slipped to Rs 85.50 per dollar. The same tonne now costs roughly Rs 76,950, a rise of about Rs 2,070 per tonne, purely from the currency move.

A refiner who hedges only the dollar price of palm oil, and ignores the rupee leg, is not fully hedged. NCDEX crude palm oil futures are quoted in rupees, so the futures price itself already carries this currency effect — which is exactly why the workbook treats currency movement as a price driver in its own right, distinct from the commodity's own demand-supply balance.

Chapter 1, section 1.7 (Factors Impacting Commodity Prices), lists currency movement as a standalone driver alongside demand-supply, seasonality, news, geopolitics, macroeconomics and interest rates. Expect a direction question — does rupee appreciation make an imported commodity cheaper or costlier in India — and a question connecting this to the fourth interest-rate channel, where currency appreciation is itself one of the mechanisms by which higher rates cool commodity prices.

• Appreciation of the rupee makes commodities cheaper in India; depreciation makes them costlier. It is easy to flip the direction under exam pressure — anchor it to "a stronger rupee buys more dollars' worth of goods."
• This is a separate driver from interest rates, even though the two connect: currency appreciation is one of four channels through which higher interest rates affect commodity prices, not a restatement of the same idea.
• Currency effect applies most cleanly to internationally traded commodities. A purely domestic agricultural commodity with no import or export channel is far less exposed to the rupee-dollar rate.