Higher inflation: more bad news for India

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India's economy ( EPI , quote ) took another turn for the worse this week when data released yesterday indicated a rise in consumer prices , bucking a trend of decreasing inflation.

[caption id="attachment_59479" align="alignright" width="300" caption="Mumbai, gateway of India"] Image courtesy Andy Hay: http://www.everystockphoto.com/photographer.php?photographer_id=3524 [/caption]

Combined with slowing growth, political gridlock , and a harsh climate for foreign investment, inflationary pressure renders India's short-term outlook increasingly bleak.

As the Indian economy ( INDY , quote ) has slowed recently, dissipating inflation had been something of a silver lining. Because it is a net importer of fuel and its lower and middle classes are particularly sensitive to food inflation increases, India's economic breather may not have been all doom and gloom.

However, in light of this most recent uptick in inflation, Indian observers are rightly wary, especially because it appears as if the Reserve Bank of India will continue to employ measures to promote growth at the risk of stoking inflation. The new development puts India's central bank in a policy bind.

While high inflation can be problematic in any economy, food inflation can be especially deleterious to Indian society. Recent instances of high food prices led to destabilizing food riots. Sustained inflation would be disastrous for the country's emerging middle class.

Also troubling are the potential ramifications of high inflation on politics. India is already suffering from bouts of populism with the rise of non-traditional political parties . This has led to increased gridlock in New Delhi which has prevented meaningful reform from being accomplished. Were inflation to continue to rise and have a material affect on the food prices of the lower and middle class, such populist entities would very likely see an increase in support which would, in turn, further decrease the efficacy of policy-making bodies in New Delhi.

Now is not the time to go long Indian companies that derive most of their income from India's domestic market in rupees such as ICICI Bank ( IBN , quote ) and HDFC Bank ( HDB , quote ). However, Indian firms whose revenues are mostly international and foreign currency-denominated should not be avoided just because of Indian domestic concerns. These include Tata Motors ( TTM , quote ), Infosys ( INFY , quote ), and Wipro ( WIT , quote ).

Disclosure: Author's immediate family is long TTM and remains inexplicably long EPI

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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