BRICs Crumble Under Threat of Inflation

Don’t look now... but the BRICs are falling! The group of fast-growing emerging market countries which includes: Brazil, Russia, India, and China are facing their biggest economic challenge this decade. Inflation is accelerating in the BRIC economies and central bankers are responding by raising rates and tightening monetary policy.

While these moves may be necessary to combat inflation, tight money policies are usually a very unfriendly environment for stock investors.

India is the latest BRIC under fire. With wholesale price inflation running at 11% – the highest level in 13 years and climbing – the Reserve Bank of India responded last week by raising its benchmark lending rate to 8%. Global investors are signaling a vote of “no confidence” however, as they send Indian stocks plunging.

India’s currency, the rupee, is also under attack, having lost 8% of its value against the dollar this year – the worst performance for the rupee since 1993.

Inflation Looms as Biggest BRIC Threat

Spiraling inflation has reached a tipping point, where rising import prices (particularly food and energy) are hammering consumer spending power. The result has been a dramatic reversal of fortune for India, including an erosion of investor confidence in its currency and its capital markets.

Overseas fund managers were big buyers of Indian stocks in recent years, but have turned into net sellers. After $19.5 billion flowed into Indian stocks and bonds last year, foreign investors yanked $5.3 billion out of the country’s exchanges so far this year.

India is in the riskiest position among the BRICs in this environment of soaring commodity inflation. That’s because India is a net importer of most resources, including 75% of its oil.

Brazil meanwhile is a leading exporter of agricultural products and metals, And thanks to a growing energy industry and new offshore oil fields, Brazil should become energy self-sufficient this year.

Russia of course is one of the world’s largest oil producers, so it too enjoys a favorable trade balance. And China has a record $262 billion trade surplus, in spite of the fact that it too is a net importer of just about everything. Also, China has the world’s largest currency reserves at $1.7 trillion and growing at nearly $2 billion a day.

Is India an Early-Warning Sign for the BRICs?.

Still, the BRIC economies are all under serious threat of seeing their economies crumble under the threat of runaway inflation. India’s troubles are perhaps just an early-warning sign. Inflation in China is running close to 8% in spite of several interest rate increases last year. Inflation just topped 15% in Russia. Brazil, which suffered a painful hyper-inflationary past, recently raised interest rates after inflation crept up to 5.4%.

Stock investors, seeing this threat on the horizon, have been busy pulling money out of the BRIC markets. China’s CSI 300 Index is down over 50% from its 2007 high, while India’s Sensex Index has plunged by one-third in value. Share prices in the first two markets of the BRIC alphabet, Brazil and Russia, have so far held up well. This is due in no small part to their favorable trade terms. 

All of the BRICs are threatened by the risk of inflation. As an Indian government official put it, “Until inflation slows, this crisis is only going to widen.”