Consistent US Inflation will have Greater Impact on the Indian Economy

By siliconindia   |   Saturday, 16 July 2022, 02:24 IST
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Consistent US Inflation will have Greater Impact on the Indian Economy

The rise in the US inflation rate to 9.1 per cent in June, the highest in 41 years, will have a significant impact on the Indian economy

The United States Department of Labor’s data showed a radical hike in the inflation rate from 8.6 per cent recorded in May to 9.1 per cent in June. Markets expected US Consumer Price Index (CPI) inflation to reach 8.8 per cent in June 2022. This rise in the inflation rate is the highest in the country since 1981. This could lead to an aggressive monetary policy response from the Federal Reserve and the possibility of another 75 basis point rate hike in their upcoming policy review later this month.

In response to rising inflation, Fed policymakers have indicated a second 75-basis-point rate hike later this month. The continuing elevation in inflation is pushing federal officials to engage in the fastest series of rate hikes since the late 1980s to track the inflation rate. The US Federal Reserve, which raised interest rates by 75 basis points, is the highest hike in 28 years to raise inflation. The central bank is expecting compelling evidence of a deceleration of inflation before slowing down its rate hikes.

High inflation in the US is also causing another rate hike at the upcoming Federal Open Market Committee (FOMC) meeting scheduled for July 27, 2022. The FOMC is a Federal Reserve committee that determines interest rates in the United States. It is anticipated that this meeting will result in an increase of 75 bps in US policy rates.

Experts find that US inflation will impact India in three different ways. It is resulting in narrowing interest rate differentials between India and the US. Therefore, India would be a less popular destination for currency trade. Secondly, higher returns in the US debt markets may cause a churn in emerging market stocks, which would decrease international investors' enthusiasm for investing in India. Finally, due to this withdrawal from Indian equities and debt markets, it might affect currency markets.

The Indian rupee is already under pressure because of FPI selling that has lasted nine months in a row, and analysts predict that the CAD will increase to 105 billion USD in FY23 from 39 billion in FY22. Overall, a strong dollar environment and the likelihood of a BoP deficit of 1% of GDP might put the rupee under mild pressure. Before the end of FY23, India anticipated that the rupee would depreciate to 81 levels. However, the rate of increase can only be determined by the FOMC meeting in July to discuss ways to control inflation.