AI Power Demand Boosts Nuclear Energy as India Raises Rates Amid Inflation
Julius Baer's latest review highlights how AI data centers are driving nuclear energy demand, while the Reserve Bank of India raised interest rates to 5.50% amid rising inflation.
The artificial intelligence revolution is transforming not only the technology sector but also global energy markets and economics. Rising electricity demand from data centers is boosting the standing of nuclear power plants and encouraging investments in new technologies, while India faces accelerating inflation that has prompted its central bank to raise interest rates for the first time since 2023. These are two central topics in the latest market review from Julius Baer.
According to Norbert Rücker, Head of Economics and Next Generation Research at Julius Baer, the breakthrough in artificial intelligence and the rapid expansion of data centers are creating unprecedented demand for electricity. Technology giants operating data centers, known as hyperscalers, display a high willingness to pay a premium for continuous power supplies out of fear of falling behind in the AI race.
Demand from tech companies is also breathing new life into existing nuclear power plants, primarily in the United States. Through power purchase agreements (PPAs) and capital injections from tech firms, shuttered plants are returning to operation, while active facilities are receiving equipment upgrades and capacity expansions.
Julius Baer estimates that small modular reactor (SMR) technology could reach a commercial breakthrough later this decade, largely financed by the hyperscalers. According to the review, this represents one of the anticipated structural shifts of the coming decade in the broader transition to clean energy.
Challenges in Nuclear Energy and the Rise of Renewables
However, despite renewed interest in nuclear energy, the construction of new plants in the West remains economically unviable. Julius Baer notes that projects in Europe suffer from significant cost overruns and depend heavily on government support. Meanwhile, solar and wind energy continue to provide substantial competition thanks to low production costs and improving reliability driven by falling battery storage prices.
The Julius Baer review also argues that the narrative surrounding a "power shortage" is exaggerated. The core problem, according to the review, is not a lack of generation capacity, but rather bureaucratic delays in grid access and connections. In practice, the addition of solar and wind energy in the United States covers almost the entire increase in data center demand.
Julius Baer maintains a positive stance on the clean energy sector. Conversely, the highest vulnerability is recorded in the gas turbine sector, which suffers from overpricing and is exposed to technological advancements in energy storage and batteries.
India Raises Interest Rates Amid Accelerating Inflation
Simultaneously, Sok Yin Yong, Asian Fixed Income Analyst at Julius Baer, addresses the decision by the Reserve Bank of India (RBI) to raise its policy interest rate by 25 basis points to 5.50%. This marks the central bank's first rate hike since February 2023.
The decision was unanimous, though a 4-2 majority voted to shift the policy stance from neutral to calibrated tightening. The RBI clarified that rate cuts are not expected in the near term, and its next step will be either another hike or a pause, depending on core inflation data.
This move comes against the backdrop of accelerating inflation and mounting price pressures. After the consumer price index rose to 4.38% year-on-year in August, September's reading is expected to jump to around 5.6%. Julius Baer notes that inflation is broadening and encompassing larger portions of the consumer basket.
Among the primary drivers of price pressures are energy prices, with Brent crude trading above $100 a barrel alongside geopolitical volatility in the Middle East. The intensification of the El Niño phenomenon also threatens agricultural output, coinciding with increased holiday consumption lasting through the end of November.
Currency Pressures and Upgraded Growth Forecasts
Another factor is the depreciation of the Indian rupee, which has weakened by 7.12% against the dollar since the beginning of the year, approaching historical lows. Currency depreciation increases imported inflation risks.
As part of its forecast update for the 2027 fiscal year ending in March 2027, the RBI raised its headline inflation forecast to 5.2% annually, compared to a 4% target, and core inflation to 4.4%. Concurrently, GDP growth forecasts were upgraded from 6.7% to 7.1% amid robust domestic demand and stronger-than-expected economic activity, allowing the economy to absorb the tightening of monetary policy.
Markets are already reacting to the move: Indian government bond (IGB) yields climbed to their highest level in nearly three years, and markets heavily expect the RBI to implement another 25-basis-point rate hike at its upcoming December meeting.
