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Prolonged high temperatures in India could worsen inflation, hurt growth: Moody's.


Date: 24-05-2022
Subject: Prolonged high temperatures in India could worsen inflation, hurt growth: Moody's
Prolonged high temperatures are credit negative for India, as that could exacerbate inflation and hurt growth, Moody's Investors Service wrote in a note on Monday.

India's highly negative credit exposure to physical climate risks means its economic growth, over the long term, will likely become more volatile as it faces increasing, and more extreme incidences of climate-related shocks, it noted.

Various parts of India have been experiencing crippling heat over the past few weeks. Multiple reports have emerged of it having an impact on crop yields as well.

Moody's said that although heatwaves are fairly common in India, they usually occur in May and June. However, this year New Delhi witnessed the fifth heatwave in May with the maximum temperature touching 49 degrees celsius.

"The prolonged high temperatures, which are affecting much of the northwest of the country, will curb wheat production and could lead to extended power outages, exacerbating already high inflation and hurting growth, a credit negative," Moody's said.
The Centre has revised downwards its estimates for wheat production by 5.4% to 105 million tonnes for the crop year ending June 2022, given lower yields amid higher temperatures.

"The lower production, and fears that a surge in exports to capitalise on high global wheat prices would add to inflationary pressures domestically, has prompted the government to ban the export of wheat and to divert it toward local consumption instead.

"Although the move will partially offset inflationary pressures, it will hurt exports and subsequently growth. The ban comes at a time when India - the world's second-largest wheat producer - could have been capitalising on the global output gap from wheat following the Russia-Ukraine military conflict," Moody's said.

Global wheat prices have jumped 47% since the conflict began in late February.

The agency said India's export partners will likely face a further surge in wheat prices because of the ban. They include Bangladesh, which absorbed 56.8% of India's wheat exports in fiscal 2021, Sri Lanka (8.3%), UAE (6.5%) and Indonesia (5.4%).

"Inflation will be partially alleviated by keeping wheat production for domestic consumption and the cap in power prices in exchanges, as well as the Reserve Bank of India's 40-basis-point policy rate rise in early May. However, given the prominence of cereals and food more generally in India's consumption, elevated food prices could add to social risks if they persist," Moody's said.

Moody's also said that further drawdowns in coal inventory could lead to prolonged power outages in industrial and agricultural production, leading to significant cuts to output and weighing further on India's economic growth - particularly if the heatwaves continue beyond June.

Source Name:-Economic Times




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