NEW DELHI: US retail inflation topping 9.1% in June could have repercussions for India as the Reserve Bank of India may be forced to increase interest rates to keep pace with the US. The US Federal Reserve is widely expected to hike rates more sharply in view of the spike in inflation.
The latest inflation print at 9.1% (it was 8.6% in May) is higher than analysts’ estimate of 8.8%. Analysts say the US Fed will raise rates by 75-100 basis points in July and 50-75 basis points in August. Such an action will strengthen the US dollar further, as more money from emerging markets will move to US safe havens.
“RBI will be forced to hike rates in sync with the US to keep the interest rate differential between the US and India within a range to protect the Rupee from further sharp depreciation,” said capital markets expert Ajay Bagga. India has already seen foreign portfolio investors taking out $23 billion from debt and equity markets since the start of 2022.
This has led to over 7% fall in the value of rupee vis-avis the US dollar. Indian rupee was inching towards 80 a dollar level against 74.4 at the start of 2022. The rupee is currently trading around 79.8 levels. The Indian central bank has already increased short term policy rates by 90 basis points in two months – (50 basis points in May and 40 basis points in June this year).
With lower than estimated June inflation in India and falling crude oil prices, experts say RBI may go slow on rate hike. Consistently high inflation in the US may force the Fed to pursue a contractionary monetary policy — tightening liquidity and increasing short-term interest rates.
“A contractionary monetary policy in the US may also induce a short-term capital flight from emerging markets such as India, seriously affecting exchange rate, interest rate and growth in these countries,” says Deepanshu Mohan, associate professor of economics, Jindal School of Liberal Arts and Humanities.