India is now in a dilemma...

 Japanese media said that due to the impact of the new crown pneumonia epidemic, the problem of rising prices in emerging economies has become increasingly serious. In India, stagnant logistics has led to an increase in the price of vegetable-based foods. In Turkey, the depreciation of the local currency has led to a double-digit increase in the prices of imported goods such as wheat. Although the central bank hopes to lower interest rates to support the economy, this may lead to a worsening of the situation in which rising prices of imported goods push up overall prices. Rising prices are suppressing the effects of quantitative easing measures and may delay the pace of economic recovery.

According to a report by the Nikkei on October 5, affected by the epidemic, countries have introduced quantitative easing measures. However, emerging economies have to sell their currencies in many cases due to their weak economic foundations. The resulting depreciation of their currencies will increase the price of imported goods, which further intensifies the pressure on domestic prices. The spread of the epidemic has also led to chaos in the supply chain. Affected by this, prices have fluctuated.

According to reports, a man who runs a fruit and vegetable shop in New Delhi, the capital of India, is very helpless with the high prices of vegetables. According to him, almost all customers will let him sell at a lower price, and some people simply reduce the amount of purchase. In September, the prices of onions and potatoes, which are essential ingredients for making curry, rose 10% from August.

The report also said that the number of confirmed cases of new coronary pneumonia in India has exceeded 6.5 million, and the stagnation of logistics has led to insufficient food supplies in urban areas. The overall level of consumer prices in August rose by 6.69% year-on-year, higher than the 6% policy target limit set by the central bank for three consecutive months. Among them, vegetable prices rose 11% year-on-year, and meat and fish prices rose 16% year-on-year. The depreciation of the local currency also caused energy prices to rise.

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▲ Profile picture: On February 23, 2020, in Agra, India, a security officer patrolled in front of the Taj Mahal. (Issued by Xinhua News Agency)

The report noted that India’s gross domestic product (GDP) in the quarter from April to June recorded the largest drop in history of 23.9%, and there are views that the country’s annual decline in this fiscal year may exceed 10%. In order to support the economy, it was necessary to lower interest rates, but once interest rates are lowered, the devaluation of the local currency and the superposition of stimulus policies will further aggravate price increases.

The report pointed out that food prices in Brazil also rose by 8.8% year-on-year in August, and the price of rice, which is indispensable on the table of Brazilian families, increased by more than 19%. The depreciation of the local currency has caused food prices to rise, and the impact of the epidemic has caused the domestic supply chain to break.

The report also pointed out that Brazil began to cut interest rates in July 2019, and the current policy interest rate has dropped to an unprecedented 2%. But the current price increase is higher than the policy interest rate, which means that the real interest rate has fallen into the negative range, and depositing money in the bank is equivalent to devaluation. The Central Bank of Brazil believes that it is difficult to continue to cut interest rates, and did not introduce new quantitative easing measures at the September meeting.

The report said that even if the economy of emerging markets continues to be sluggish, some countries still have to raise interest rates in order to curb the depreciation of their currencies and the rate of price increases.

The report noted that the Central Bank of Turkey decided to raise the key interest rate to 10.25% at its September 24 meeting. In order to defend the local currency lira, which has fallen to the lowest level in history, the Turkish Central Bank finally decided to raise interest rates again after two years.

According to reports, Turkey’s consumer price index (CPI) rose 11.77% year-on-year in August. In September, affected by the increase in raw material prices, Istanbul, the country's largest city, increased the price of national bread for the first time in about two and a half years. During the same period, the country's wheat prices rose by 85%, and electricity bills soared by 133%. The price increase is mainly due to the depreciation of the local currency lira, and the exchange rate of the lira against the US dollar has hit new lows for several days, which has fallen by more than 20% from the beginning of the year.

The report also said that Turkey's GDP in the second quarter fell by 9.9% year-on-year, and the tourism industry, which is mainly financed by foreign exchange income, continued to be in a downturn. Under normal circumstances, interest rate cuts are taken to support the economy, but this time Turkey chose to give priority to the devaluation of its currency and was forced to make a difficult decision to raise interest rates. It is undeniable that the financial tightening brought about by interest rate hikes may continue to cool the already sluggish economy.

The report believes that emerging economies are in a dilemma. On the one hand, people’s lives are in trouble due to rising prices, and on the other hand, easing measures are needed to stimulate the economy. If financial means cannot be used to stimulate the economy for a long period of time, it is likely to further delay the pace of economic recovery.