India is burning. The UK Foreign Office, not a body prone to hyperbole, has issued a travel warning citing ‘blistering heat’ in the subcontinent. Temperatures are topping 50°C in parts of Rajasthan and Delhi. For the holidaymaker in Hampstead, this means a grim fortnight in Goa. For the investor, it spells something far more insidious: a reminder that climate risk is balance sheet risk.
Let’s be clear. The immediate casualty is the rupee. The Indian currency has been sliding against the dollar for weeks, and a heatwave that cripples agriculture and strains the power grid is hardly a vote of confidence. India imports roughly 80% of its oil. When the mercury rises, so does the demand for air conditioning, which means more oil imports, which means a wider current account deficit. The rupee, already under pressure from capital flight as global rates stay higher for longer, now faces a fundamental headwind. The Reserve Bank of India can intervene, but it’s fighting a losing battle. The rupee at 83.5 to the dollar looks vulnerable. I’d pencil in 85 by month end.
Then there is the government bond market. Indian 10-year yields have been creeping up, now near 7.2%. A heatwave adds two risks. First, food inflation. The heat will devastate wheat and rice harvests. The government may need to import more grain, stoking domestic prices and forcing the RBI to hold rates higher for longer. Second, fiscal pressure. The government will have to spend more on relief, and more on electricity subsidies, all while tax revenues from a slowing economy ebb. That means more borrowing, which means more supply of bonds. Ask any gilt trader: when supply meets weak demand, yields go up and prices go down.
But the real story is capital flight. Emerging markets have been out of favour all year. The MSCI India index has fallen 8% from its September peak. If this heatwave persists, foreign portfolio investors will see it as a systemic risk. They will ask: is India’s infrastructure resilient? Can the power grid cope? Will the government’s fiscal rule hold? The answer, increasingly, is no. And so they sell. India may be the fastest growing major economy, but markets care about the marginal buyer. When the marginal buyer is an ETF manager in London reducing exposure to EM, the index falls first, fundamentals second.
What does this mean for the British investor? Directly, quite a lot. Many UK pension funds hold Indian equities and bonds. A 10% drop in the Nifty 50 is a 0.2% drag on the typical balanced fund. Indirectly, it’s a reminder that the global economy is interwoven. The heat in India pushes up global food prices. That feeds into UK CPI via the supermarket aisle. The Bank of England, already wrestling with sticky services inflation, will take note. The odds of a rate cut in June just got longer.
So the Foreign Office is right to warn of ‘blistering heat’. But for those of us watching the numbers, the heat is not just in the air. It’s in the bond curve. It’s in the currency cross. It’s in the portfolio flow. And it’s not going to cool off anytime soon.
