NEW DELHI: With US inflation staying at a 40-year high, analysts expect a further flight of capital from emerging markets, including India, triggering a massive sell-off in equity markets and making the rupee weaker.
US inflation in May rose to its highest point since 1981 as the Consumer Price Index recorded a 8.6% year-on-year growth on the back of higher fuel, food and shelter prices. This is more than 8.3% forecast by analysts. Retail inflation in April was at 8.3%.
Analysts said the higher-than-expected inflation will firm up the US central bank’s resolve to increase rates at every Federal Open Market Committee (FOMC) meeting. FOMC is a Federal Reserve committee that decides US interest rates. Analysts believe when the FOMC meets next week, it will increase US policy rates by at least 50 basis points (bps). The Fed raised policy rates by 25 bps in March and 50 bps in May.
“India will be impacted. The sustained high inflation would force the US Fed to keep increasing policy rates. This, in turn, will have an impact on capital flow to emerging markets, including India,” said Shubhada Rao, an economist and founder of QuantEco Research. Till June 10, foreign portfolio investors in India had withdrawn $25 billion.
The rupee, which has already declined 5% against the dollar, may further come under pressure if Fed interest rate hike accelerates capital outflow. At the time of writing this report, the rupee was trading at 78.13 per dollar.
Benchmark Indian equity indices Sensex and Nifty have shed 8% and 10-year GoI bond yields have risen 16% since the beginning of 2022. However, some market experts such as Vinod Nair of Geojit Financial Services, expect a moderation in FII selling in the near future.