US inflation reaches 9.1% in June, highest in 41 yrs: How will it impact India?

The inflation in US has come at 9.1 per cent in the month of June, this is the highest inflation in the country since 1981, the Labor Department data showed Wednesday, rising from its 8.6 per cent level recorded in the month of May. The markets were expecting US Consumer Price Index (CPI) inflation to scale a fresh multi-year high of 8.8 per cent in June, 2022.  

“This could once again elicit aggressive monetary policy response from the Federal Reserve, raising the likelihood of another 75 bps rate hike in their upcoming policy review later this month,” said Vivek Kumar, economist at QuanEco said.  

Fed policy makers have already signaled a second 75 basis-point hike in interest rates later this month amid persistent inflation. The consistently high inflation had pushed Fed officials, to engage in fastest series of rate hikes since the late 1980s, in a bid to tame inflation. The US Federal Reserve in June raised interest rates by 75 basis points or 0.75 percentage points, the biggest hike in 28 years, to stem a surge in inflation. Fed Chair Jeremy Powell, at a news conference last month, said and made it clear that the central bank wants to see “compelling evidence” that inflation is slowing before it would dial back its rate hikes.  

Many experts have also said that high inflation in US has warranted another rate hike at the upcoming Federal Open Market Committee (FOMC) meeting, which is scheduled to take place on July 27. FOMC is a Federal Reserve committee that decides US interest rates. Analysts believe when the FOMC will meet later this month, it will increase US policy rates by at least 75 bps. 

“Continuation of aggressive monetary policy action by the US Fed will keep emerging markets under pressure through the channel of capital flows and exchange rate,” QuantEco’s Kumar explained. 

This will impact India in three possible ways: firstly, India would become less attractive destination for the currency carry trade as the differential interest rate between India and US is narrowing. Second, higher returns in the US debt markets could also trigger a churn in emerging market equities, which will dampen the spirit of foreign investors’ from investing in India. Third, this will have a potential impact on currency markets, because of the outflows from Indian equity and debt markets. 

“Already, in case of India, nine consecutive months of selling by FPIs is weighing upon the Indian rupee amidst expectation of widening of CAD to $105 billion in FY23 from $39 billion in FY22. Overall, a bullish dollar backdrop and expectation of BoP deficit of 1 per cent of GDP could continue to keep rupee under moderate pressure. We expect rupee to depreciate towards 81 levels before the end of FY23,” Kumar said. 

However, what would be the quantum of hike? This would get clear only later this month when FOMC will meet to carve a path to tame the inflation.