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By:

Abhijit Mulye

21 August 2024 at 11:29:11 am

RBI forced to rethink inflation, growth

Mumbai: The undeniable reality of climate change is rapidly transitioning from an ecological warning to a severe economic crisis in India. Global warming is no longer just altering natural ecosystems; it is fundamentally rewriting the rules of the nation's macroeconomic stability. A stark illustration of this shift comes from the HSBC report published on Monday, which highlights how rising surface temperatures and the looming threat of El Niño are directly forcing the Reserve Bank of India to...

RBI forced to rethink inflation, growth

Mumbai: The undeniable reality of climate change is rapidly transitioning from an ecological warning to a severe economic crisis in India. Global warming is no longer just altering natural ecosystems; it is fundamentally rewriting the rules of the nation's macroeconomic stability. A stark illustration of this shift comes from the HSBC report published on Monday, which highlights how rising surface temperatures and the looming threat of El Niño are directly forcing the Reserve Bank of India to reconsider its monetary policy, proving that climate shocks are now dictating everyday financial realities. ​ For decades, economists and policymakers have anxiously tracked the Indian monsoon, relying on rain gauges and reservoir levels to forecast agricultural output and inflation. However, HSBC’s analysis reveals a startling paradigm shift: tracking rising temperatures has now become a far more accurate method for predicting food inflation than observing traditional rainfall patterns. As average surface temperatures breach historical thresholds, the sensitivity of food prices to extreme heat has increased dramatically. During El Niño years, the probability of severe temperature spikes is now significantly higher than the chances of a rainfall deficit. These intensifying spikes mean the thermometer has become a far more vital forecasting tool for the central bank than the rain gauge. ​ The effects of this warming planet are cascading through various walks of life, starting at the very roots of the agricultural sector. Intense and frequent heatwaves are no longer just wilting delicate, perishable crops like fruits and vegetables, which have traditionally been highly vulnerable to sudden temperature fluctuations. The soaring mercury is now directly threatening the resilience of durable staple crops, including cereals, pulses, oilseeds, and sugar. When these crucial crops fail to withstand the intensifying heat, the immediate fallout is a sharp surge in food prices. While robust granaries might offer a temporary buffer, the overarching trend points to persistent agricultural distress, threatening food security and pushing the financial burden directly onto the plates of ordinary citizens. Complex Web ​This climate-induced disruption is creating a complex web of challenges for the national economy. The HSBC report predicts that the combination of El Niño-driven temperature shocks and global energy pressures could push headline inflation to an average of 5.6 percent in the 2026-27 financial year. This overlapping environmental and economic crisis leaves the Reserve Bank of India in a precarious position. To combat the inflationary heat, the central bank is projected to deliver two interest rate hikes between late 2026 and early 2027, ultimately pushing the repo rate to 5.75 percent. However, the central bank must tread carefully, as these relentless climate shocks are simultaneously dragging down the nation's economic momentum, with GDP growth projections downgraded from a robust 7.4 percent to a sluggish 6 percent. ​ Ultimately, the heaviest toll of this shifting climate is borne by the most vulnerable segments of society. The intersection of severe weather events, rising food costs, and tightening economic policies strikes hardest at the informal sector. Rural households, small agricultural businesses, and daily wage earners find their livelihoods increasingly squeezed by extreme weather forces entirely out of their control. The warming climate is fundamentally changing the drivers of India’s economic growth, turning environmental predictability into a luxury of the past. As policymakers grapple with these twin shocks of heat and inflation, it is evident that climate change has firmly rooted itself in every facet of Indian life.

Oil Shock

The renewed conflict involving Iran, America and Israel has pushed global oil markets into panic while revealing India’s dangerous dependence on imported energy and vulnerable maritime chokepoints. Prime Minister Narendra Modi’s unusually stark appeal to Indians to conserve petrol, diesel and cooking gas reflects the seriousness of the moment.


India imports nearly 85 percent of its crude oil and depends on the Strait of Hormuz for roughly half of those imports. The narrow waterway also handles most of India’s liquefied petroleum gas and a large portion of its LNG supplies. Any prolonged disruption there is not merely a geopolitical problem; it is an economic threat with consequences that reach every Indian household.


The warning signs are already visible. Oil prices have surged as hopes of a diplomatic settlement faded after American President Donald Trump rejected Iran’s latest proposal as “totally unacceptable.” The rupee is weakening and import bills are swelling. Economists increasingly fear that India’s current-account deficit may widen sharply if crude prices remain elevated for months rather than weeks.


India has weathered oil shocks before. But this crisis arrives at a more delicate moment. Consumption remains uneven after years of inflationary strain. Manufacturing growth is still fragile. Private investment, though improving, is hardly roaring. Higher fuel prices now threaten to seep into transport costs, food inflation and electricity tariffs simultaneously. For a country where millions remain acutely sensitive to price increases, expensive oil acts like a silent tax on growth.


The Prime Minister’s suggestion that Indians postpone gold purchases is equally telling. Gold imports drain precious foreign exchange reserves precisely when expensive crude widens the trade deficit.


The crisis also exposes the strategic contradiction at the heart of India’s rise. The country aspires to become a global manufacturing power and a $ 5 trillion economy, yet remains deeply dependent on imported energy moving through one of the world’s most volatile chokepoints. India has diversified suppliers in recent years, purchasing discounted Russian crude and expanding ties elsewhere. But diversification means little if shipping lanes themselves become vulnerable.


To its credit, the government has not entirely ignored the problem. Expansion of LPG access, piped gas networks, biofuels and CNG infrastructure reflects a longer-term attempt to reduce oil dependence. India has also aggressively promoted solar power and electric mobility. Yet transitions in energy systems move slowly, while wars move abruptly.


The deeper lesson is that energy security can no longer be treated merely as an economic matter. It is now inseparable from foreign policy, naval strategy and domestic stability. A prolonged West Asian conflict would not simply raise petrol prices in New Delhi or Mumbai. It could weaken the rupee, compress growth, worsen inflation and constrain government spending ahead of crucial political cycles. For India, the danger lies not only in the price of oil. It lies in the price of dependence. 


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