News Highlights
The US witnessed four decades of high inflation rising concern for Indian markets.
Current Impacts of US Inflation in India
- The rising inflation is a concern particularly in the Indian stock market and currency value of India.
- The rupee depreciates against the US dollar at its lowest rate of 78.13.
- 10 benchmark bonds rose 8 basis points to 7.60 percent signaling the upward pressure on interest rates in the banking system.
- Forign Portfolio Investors (FPI) are pulling out from Indian stocks due to US Federal Open Market Committee rises rates.
- Tech, metal , banking , reality stocks fell down .
- LIC shares have fallen down as anchor investors are pulling the shares after the lock-in period ended.
What is Inflation?
- It is defined as the rate at which prices rise over a set period of time.
- In India, it is frequently measured year over year.
- Indexes Used for Measuring Inflation in India
- Wholesale Price Index (WPI) measure wholesale price inflation
- Consumer Price Index (CPI) measures retail price inflation.
- India’s inflation target is a flexible 4 (+/-2) percent.
Reasons for Rising Inflation in US
- Demand Side
- The US economy rebounded sharply with the quick launch of the Covid-19 immunization campaign.
- This unexpectedly rapid recovery in overall consumer demand contributed to a portion of the inflationary increase.
- The government pushed billions of dollars into the economy to not just provide assistance to consumers and those who had lost their jobs, but also to increase demand.
- Supply Side
- Not only in the United States, but around the world, the pandemic in 2020 resulted in widespread lockdowns and disruptions.
- Employees were laid off, and productivity was drastically reduced.
- In essence, the global production supply chain has not returned to pre-pandemic levels.
- Global Inflation
- While the United States has witnessed the most dramatic spike in prices, officials in most of the major economies, including Germany, China, and Japan, have been astonished by rise of price.
The Indian Perspective On Inflation
- While most other economies were caught off guard by a price increase during the pandemic, India was one of the few large economies where substantial inflation existed prior to the outbreak.
- Even while demand in India has not yet recovered to pre-Covid levels, the pandemic compounded supply problems.
- As a result, the RBI has not decreased its benchmark interest rates (repo rate) since May 2020, despite the fact that India has entered a “technical” economic recession.
- The RBI has chosen to retain an accommodative approach for as long as it is required to reintroduce and sustain growth, as well as to mitigate the economic impact of Covid-19, while also ensuring that inflation stays under target moving forward.
- While overall inflation looks to be under control at the time, “core” inflation is a cause for concern. It is at an all-time high, on the edge of breaking the RBI’s safety margin. As a result of the worldwide price hike, India’s inflation could worsen.
Effect of US Inflation on India
- Inflationary pressures on imports will rise as global prices rise. To put it another way, whatever India and Indians import will become more expensive.
- Inflationary pressures in industrialized economies, particularly the United States, are likely to push central banks to abandon their loose monetary policies.
- In mature economies, a restrictive monetary policy would mean higher interest rates.
- Increasing interest rates to limit borrowing and boost savings is part of a tight monetary policy.
- This will have two major consequences for the Indian economy.
- It will be more expensive for Indian companies to raise funds outside of India.
- The Reserve Bank of India will have to align its monetary policy at home by hiking interest rates. As a result, inflation may rise even higher as production prices rise.
Pic Courtesy : Business Today
Content Source : Indian Express