World Economy

Growing Inflation Looms Large Over India’s Economy

Growing Inflation Looms Large Over India’s EconomyGrowing Inflation Looms Large Over India’s Economy

From rising crude oil prices to a poor start to rice-planting season, inflationary pressures in India are pushing the central bank to consider further action to prevent a runaway increase in prices.

Heavy rains in Mumbai this month have flooded roads and disrupted train service. But the country as a whole received 8% less rainfall than average from June to the beginning of July. As a result, rice planting is also down 15% by area, according to the ministry of agriculture and farmers welfare, Nikkei reported.

Farmers can still catch up if rainfall recovers. But the country will suffer from a poor harvest otherwise, and higher food prices would only add to inflationary pressures.

India’s consumer prices are on the rise. Inflation topped 4% in November after remaining under 3% for months. The rate reached 4.9% this May, up 0.3 point on the year.

Crude oil is the primary culprit. The government used to keep the retail price of gasoline in check. But fluctuations in the market now directly hit consumers’ wallets.

Higher crude prices also eat into government coffers. India relies on imports for over 80% of its supply. Rising prices push up the current-account deficit and mean bigger payouts of energy-related subsidies.

Crude oil is one of the biggest factors impacting the Indian economy, but the country itself cannot do anything about it, said Harshad Patwardhan, Edelweiss Asset Management’s chief investment officer for equities.

Rising crude prices mean India is forced to buy more dollars to pay for imports, which in turn softens its home currency. The rupee hit its weakest point on record at the end of June, trading for about 69 against the dollar at one point.

Interest rate hikes in the US are also pushing investors to unload the currencies of emerging economies with current-account deficits. India’s deficit reached around $49 billion for the fiscal year ended in March, and the rupee could weaken further to above 70 against the dollar.

The Reserve Bank of India raised interest rates for the first time in four and a half years in June amid growing inflationary pressures. It projected a 4.6% increase in the consumer price index in the fiscal first half and a 4.7% uptick in the second, though the index had already surpassed the first-half forecast as of May.

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