Prolonged high temperatures are a negative credit for India, as that could exacerbate inflation and hurt growth, Moody’s Investors Service said on Monday.
In the long run, India’s highly negative credit exposure to physical climate risks means economic growth is likely to become more volatile as it faces an increase, and more incidents of extreme climate -related shocks, he said.
The rating agency said although heat waves are quite common in India, they usually occur in May and June. However, this year New Delhi saw its fifth heat wave in May with maximum temperatures reaching 49 degrees celsius.
“Prolonged high temperatures, which are affecting much of the country’s northwest, will restrict wheat production and could result in prolonged power outages, exacerbating already high inflation and hurting growth, negative credit,” Moody’s said.
The Indian government has revised its wheat production estimate by 5.4 per cent to 105 million tonnes for the crop year ending June 2022, given lower yields amid higher temperatures.
“Lower production, and concerns that a surge in exports to capitalize on high global wheat prices will add to inflationary pressures in the country, have prompted the government to ban wheat exports and instead shift them towards local consumption.
“While the move will offset some of the inflationary pressures, it will hurt exports and hence growth. The ban comes at a time when India – the world’s second largest wheat producer – could capitalize on the global production gap from wheat following the Russia -Ukraine military conflict,” Moody’s said. .
Global wheat prices have jumped 47 percent since the conflict began in late February.
The agency said India’s export partners are likely to face further spikes in wheat prices because of the ban. They include Bangladesh, which absorbed 56.8 per cent of India’s wheat exports in fiscal 2021, Sri Lanka (8.3 per cent), the UAE (6.5 per cent) and Indonesia (5.4 per cent).
Moody’s also said that further production in coal inventories could lead to prolonged power outages in industrial and agricultural production, leading to significant reductions in production and further burdening India’s economic growth – especially if the heat wave continues after June.
“Inflation will be partially reduced by maintaining wheat production for domestic consumption and power price limits on the exchange, as well as raising the Reserve Bank of India’s 40 basis point policy rate in early May.
“However, given the preference of grains and food in general in Indian consumption, high food prices could add to social risks if they continue,” Moody’s said.
Rising prices in all goods from fuel to vegetables and cooking oil pushed IDR or wholesale price inflation to a record high of 15.08 per cent in April and retail inflation to a nearly eight-year high of 7.79 per cent.
High inflation prompted the Reserve Bank of India (RBI) to hold an unscheduled meeting to raise its benchmark interest rate by 40 basis points to 4.40 per cent earlier this month.