Inflation in India and Vietnam

Robert Hsu, June 13, 2008

As you know, there is a huge shift going on right now on the global economic scene. Emerging countries are quickly growing and joining the ranks of other major economic players. But this growth is easier said than done, especially as countries all over the world -- developed and undeveloped -- are battling record-high inflation.

Take India, for example. Despite economic growth clocking in at 8.8% so far this year, India is struggling economically due to elevated inflation rates. Inflation has doubled in the past four months to 8.1%, the highest rate in more than three and half years. Rising prices of rice, lentils and other staples has hurt more than half of India's 1.1 billion people who live on less than $2 a day.

To combat surging inflation, India's central bank has twice forced lenders to set aside more reserves this year, after raising its key interest rate seven times in the past two and half years to 7.75%. With interest rates at such high levels, India's people have been discouraged and lack the desire to spend money or make investments. A situation that will ultimately slow economic growth in the country.

Another country that is struggling from a nosebleed inflation rate is Vietnam. The country's inflation rate accelerated to 25.2% in May, the highest rate since 1992. Much of that surge was driven by a 67.8% year-on-year increase in the grain prices, and a 22.9% increase in construction and housing costs from a year ago.

These high inflation rates have weighed heavily on Vietnam's stock market -- it is the world's biggest decliner for the year. Vietnam's benchmark Ho Chi Minh Index fell for a fourth-straight week, taking its declines this year to 55%.

This creates a sticky situation for investors, because these countries offer extraordinary investment opportunities, yet there is more risk because of these economic problems.

For more of my analysis of these countries and issues, as well as my recommendations for where to focus your investments, join China Strategy today.

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