Market Overview

India's Bad Inflation Might Get Much Worse

India's inflation rate is currently the worst among major economies in East Asia. Unfortunately for those holding their savings in the Indian rupee, inflation could rise further.

India's central bank has already raised interest rates ten times since March 2010, according to Bloomberg.

The moves by the Indian central bank have been somewhat successful in stemming inflation thus far. Food inflation has declined from an annual rate of near 20% down to just 8%.

However, if rainfall comes in worse than anticipated, that trend could rapidly reverse.

India's food production may fall without the necessary rains, which could lead to the country importing more food. That might mean higher grocery bills for Indian consumers, and a greater rate of inflation.

According to Seeking Alpha, Indians have increased their gold demand significantly as of late.

Compared to last year, Indian gold imports for the month of May are up 222%.

Generally speaking, India imports a relatively large amount of gold. Indian culture places a premium on gold, as it is used extensively in Indian cultural traditions.

Still, an increase of over 200% in one year might indicate that there are other factors in play. Indians may be purchasing gold in record amounts to hedge against the risk of inflation.

Action Items

Bullish: Traders who believe that inflation will continue to be a problem in India might want to consider the following trades:

  • Buy SPDR Gold Trust (NYSE: GLD) in a long play on gold. If Indians are buying gold to ward off inflation, and inflation continues to be a problem in India, demand for gold may remain high, which could be bullish for GLD.
  • Short iPath MSCI India Index ETN (NYSE: INP) in a short play on the broader Indian economy. If inflation continues to damage the Indian economy, INP may do poorly.

Bearish: Traders who believe that India will be able to stem its inflation may consider taking positions in the following:

  • WisdomTree India Earnings Fund (NYSE: EPI) is a long play on the Indian economy. EPI attempts to return a value corresponding to the performance of profitable Indian companies, and may do well if the Indian economy grows.
  • WisdomTree Dreyfus Indian Rupee Fund (NYSE: ICN) is a long play on the Indian rupee. If inflation stabilizes in India, the rupee may appreciate, and ICN might rally.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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