Prolonged high temperature may increase inflation, impact on growth: Moody’s
Moody’s Investors Service on Monday said prolonged high temperatures are negative for India, as it could drive up inflation and hit growth. In the long term, India’s extreme downside credit exposure to physical climate risks means that its economic growth will become more volatile as it continues to grow, and faces more extreme events of climate-related shocks, it notes. has been done.
The rating agency said that although heatwaves are quite common in India, they usually occur in May and June. However, this year New Delhi witnessed its fifth heatwave in May, with the maximum temperature touching 49 degrees Celsius.
“Prolonged high temperatures, which are affecting much of the country’s northwest, will curtail wheat production and could lead to power outages, adding to already high inflation,” Moody’s said. and is hurting growth, a debt negative,” Moody’s said.
Faced with lower yields amid high temperatures, the Indian government has raised its wheat production forecast by 5.4 per cent to 105 million tonnes for the crop year ending June 2022.
“Low production, and fears that increasing exports to capitalize on higher global wheat prices will add to inflationary pressures domestically, have prompted the government to ban wheat exports and divert it towards local consumption.
“While the move will partially relieve inflationary pressures, it will hurt exports and subsequent growth. The ban comes at a time when India – the world’s second largest wheat producer – after Russia has been on the global production gap from wheat. Could capitalize on – Ukraine military conflict,” Moody’s said.
Global wheat prices have risen 47 per cent since the conflict began in late February. The agency said India’s export partners may face further jump in wheat prices due to the ban. These include Bangladesh, which absorbed 56.8 percent of India’s wheat exports in FY21, Sri Lanka (8.3 percent), the United Arab Emirates (6.5 percent), and Indonesia (5.4 percent).
Moody’s also said a further drop in coal inventories could lead to prolonged power cuts in industrial and agricultural output, leading to significant production cuts and further burdening India’s economic growth – especially If the heatwave continues beyond June.
“Inflation will be partially moderated by the Reserve Bank of India’s 40-basis-point policy rate hike in early May, along with cap in production of wheat for domestic consumption and electricity prices at exchanges.
“However, given the prominence of cereals and food in general in India’s consumption, higher food prices may exacerbate societal risks,” Moody’s said.
A rise in prices of all commodities from fuel to vegetables and cooking oil pushed wholesale price inflation to a record high of 15.08 per cent in April and retail inflation to an almost eight-year high of 7.79 per cent.
High inflation prompted the Reserve Bank to hold an unscheduled meeting earlier this month to raise the benchmark interest rate by 40 basis points to 4.40 per cent.
Read also: WPI inflation hits record high of 15.08% in April on price hike of all commodities