Aug 28 / Alef Dias

Macroeconomics Weekly Report - 2023 08 28

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"Rice was one of the first products in which the Indian government intervened. On July 20, India banned exports of non-basmati white rice in an attempt to calm rising domestic prices. The country accounts for around 40% of the global rice exports and is the world's leading exporter."

India may “export” food inflation

  • In recent months, India has been dealing with numerous weather-related challenges that have severely impacted various crops. The most pronounced consequence of these challenges is the significant increase in food inflation, which jumped from 4.7% in the previous month to 10.6%.
  • This could be a localized problem, but when it comes to the 5th largest economy in the world, with a relevant role in several agricultural commodity markets, there is a great chance that this problem will be "exported" to other economies.
  • This "export" of inflation could be mainly due to protectionist measures to reduce/prohibit exports of agricultural commodities (such as rice and sugar) as well as initiatives to increase domestic supply through imports (such as wheat).
  • With a rise in global food inflation, central banks around the world may have to keep their interest rates high for longer than is currently expected.

Introduction

India has faced a myriad of climatic challenges in recent months, which have disrupted agricultural markets, given the country's position as a major producer and exporter. The biggest symptom of these challenges is food inflation, which has risen to 10.6% from 4.7% in the previous month, led especially by a 214% increase in vegetable prices from one month to the other, but with consequences for many other products - including rice, sugar and wheat.

As a result, headline inflation also accelerated. India's CPI rose to 7.4% year-on-year from 4.9% in June, the second consecutive month of gains - exceeding the Reserve Bank of India's target range of 2% to 6% in July for the first time in five months, and by a considerable margin.

Given India's relevance to the global economy (5th largest in the world) and its important role in several agricultural markets, this report aims to address the main impacts of Indian food inflation on the global economy.


Image 1: Headline and Food CPI – India (YoY,%)

Source: Refinitiv

Image 2: Basic Interest Rate - India (%)

Source: Reserve Bank of India

Headline inflation escalates with higher energy costs

The primary effect of this acceleration in food prices is likely to be the continued tightening of monetary policy by the Reserve Bank of India (RBI). Indian interest rates are at their highest levels for four years.

However, this shouldn't be the main impact of India's food inflation on global economies and markets. The Indian government has also adopted several protectionist measures in the agricultural commodities markets that could lead to an "export" of this inflation to other economies.

Rice was one of the first products in which the Indian government intervened. On July 20, India banned exports of non-basmati white rice in an attempt to calm rising domestic prices. The country accounts for around 40% of the global rice exports and is the world's leading exporter.

The chief economist of the International Monetary Fund (IMF), Pierre-Olivier Gourinchas, estimates that, with the ban, global prices for the cereal could rise by up to 15% this year.

Image 3: Monthly Rice Exports – India (‘000 mt)

Source: Refinitiv

Sugar should also be another commodity impacted. According to three government sources, India is on the verge of banning sugar mills from exporting in the next season, starting in October.

This will mark the first halt in shipments in seven years and is due to lower sugar cane yields derived from insufficient rainfall so far. India is the 2nd largest producer and 3rd largest exporter of sugar globally, behind only Brazil and Thailand.

In the case of wheat, India could impact the market on the demand side. There are rumors that India's central government is considering importing 9M mt of wheat from Russia through a government-to-government agreement to increase domestic stocks amid rising domestic prices.

If the rumors are confirmed, it will be the first time that India - the world's second-largest wheat producer - has imported significant quantities of wheat since 16/17. The rise in domestic prices can be attributed to a confluence of factors, including reduced production due to adverse weather, lower stocks and increased demand.

Image 4: India’s Raw Sugar Exports (‘000 MT)

Source: USDA

In summary

Unlike the main global economies, India has seen its inflation accelerate in the last few months. This process has been driven by food inflation, as the production of various crops in the country has been impacted by adverse weather conditions.

This could be a localized problem, but when it comes to the 5th largest economy in the world, with a relevant role in several agricultural commodity markets, there is a high chance that this problem will be "exported" to other economies.

As shown throughout the report, the Indian government's measures to control the domestic prices of various products - such as rice, sugar and wheat - could put bullish pressure on them and accelerate global food inflation.

If this happens, central banks around the world may have to keep their interest rates high for longer than is currently expected - impacting global economic activity and probably increasing risk aversion in the medium to long term. This move would be negative for commodities and positive for safe-haven assets - such as the US dollar and US bonds, for example.

Image 5: Wheat Imports – India (M mt)

Source: USDA (* Volume to be imported from Russia according to rumors)

Weekly Report — Macro

Written by Victor Arduin
[email protected]
Reviewed by Alef Dias
[email protected]
www.hedgepointglobal.com

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