Prolonged high temperatures are negative for India’s credit as it could exacerbate inflation and hurt growth, Moody’s Investors Service said on Monday.
In the longer term, India’s very negative credit exposure to physical climate risks means that its economic growth is likely to become more volatile as it faces increasing and more extreme impacts of climate-related shocks, said he noted.
The rating agency said that although heat waves are quite common in India, they usually occur in May and June. However, this year New Delhi experienced the fifth heat wave in May with the maximum temperature reaching 49 degrees Celsius.
“Prolonged high temperatures, which affect much of the northwest of the country, will dampen wheat production and could lead to prolonged power outages, exacerbating already high inflation and hurting growth, negative credit,” said Moody’s.
The Indian government has revised down its wheat production estimate by 5.4% to 105 million tonnes for the crop year ending in June 2022, given lower yields amid higher temperatures.
“The fall in production and fears that an increase in exports to take advantage of high world wheat prices would add to inflationary pressures at the national level, prompted the government to ban the export of wheat and divert it towards local consumption.
“While this 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 capitalized on the gap in wheat production after the Russian-Ukrainian military conflict,” Moody’s said.
World wheat prices have jumped 47% since the start of the conflict in late February.
The agency said India’s export partners are likely to face a further spike in wheat prices due to the ban. They include Bangladesh, which absorbed 56.8% of India’s wheat exports in FY 2021, Sri Lanka (8.3%), United Arab Emirates (6.5%) and India. Indonesia (5.4%).
Moody’s also said further reductions in coal stocks could lead to prolonged blackouts in industrial and agricultural production, leading to deep production cuts and further weighing on India’s economic growth, especially if waves heat continues beyond June.
“Inflation will be partially mitigated by maintaining wheat production for domestic consumption and capping electricity prices in exchanges, as well as the 40 basis point hike in the Reserve Bank of India’s policy rate. may’s beginning.
“However, given the importance of grains and foods more generally in India’s consumption, high food prices could add to social risks if they persist,” Moody’s said.
A rise in prices for everything from fuel to vegetables and cooking oil pushed the WPI or wholesale price inflation to a record high of 15.08% in April and retail inflation to a nearly eight-year high of 7.79%.
High inflation prompted the Reserve Bank of India (RBI) to hold an unscheduled meeting to raise the benchmark interest rate by 40 basis points to 4.40% earlier this month.