Commodity price rise may affect India’s economic recovery, says S&P

Rising commodity prices, further triggered by the Russia-Ukraine war, could moderate healthy recovery of the country’s economy, and put pressure on the Reserve Bank of India (RBI) to normalise its monetary policy faster than anticipated, S&P Global Ratings said in a report on Thursday.

Due to the ongoing Russia-Ukraine war, India may face higher expenditure on items that the government subsidises, particularly food and fertiliser, if these markets are upended for an extended period.

Higher commodity prices could also undermine buoyant private consumption trends in India as households spend more on those items, S&P wrote in the report on the spillover of the conflict in Ukraine on Asia-Pacific countries.

This could lead to a moderation in the Indian economy’s healthy recovery, the report said.

The Cons­u­mer Price Index-based inflation has been margin­ally above the RBI’s target range of 2-6 per cent for two consecutive months.

“A further acceleration could put more pressure on the central bank to normalise its monetary policy more quickly, including possible rate hikes,” the report said.

The report also said emerging market sovereign nations have seen increased yields on their debt since the start of the conflict in Ukraine even as some higher rated nations su­ch as China, Japan, and Ko­rea have not seen significant cha­nges in their borrowing costs.

The five-year benchmark yields on local-currency government debt issued by India, Indonesia, the Philippines, and Vietnam have risen 25 basis points (bps) to 90 bps since mid-February, the report said. “These four sovereigns should find the increase in interest payments manageable,” it said.

Higher inflation directly affects sovereign-debt metrics and rising rates raises the interest payments on government debt, outpacing increases in revenue. “It is also possible that higher inflation could raise the cost of budgetary spending to force governments to issue more debt,” it said.

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