Higher oil prices and coal shortages risk fanning inflation and slowing economic growth in India ahead of a central bank meeting, while punishing the nation’s currency and bonds.
A lack of coal means factories could shut, while forcing India to import more fossil fuels at a time when crude prices at a seven-year high are already weighing on the energy hungry nation. The threat of inflation and worsening external deficit have led to a 12 basis-point surge in the nation’s benchmark bond yields over the past two weeks and a decline in the rupee.
“This is a negative economic shock, since it will result in higher inflation, lower growth and potentially wider twin deficits,” said Sonal Varma, chief economist for India and Asia, ex-Japan, at Nomura Holdings Inc.
