After the US Federal Reserve has raised its key interest rate by 75 basis points, there are concerns over its impact on inflation in India as it may weaken the rupee through possible foreign investment outflows going forward. However, four economists news18.com spoke with said it will not have any direct impact on the consumer prices in India for now.
They, however, said that in the coming months, if the rupee keeps weakening due to the FPI outflows, it will raise inflation through costlier imports. Else, the US Fed hike might have a positive impact on prices here if global commodity prices are “anchored” as a result of higher interest rates.
The US Federal Reserve has raised its key interest rate by 75 basis points (bps), which is the highest since 1994. It had earlier planned a 50-bps hike for the June meeting but the US consumer inflation came higher than expected in May, at a four-decade high of 8.6 per cent.
Bank of Baroda Chief Economist Madan Sabnavis said, “There is no direct impact of US Fed hike on consumer prices in India. However, foreign funds in India will be adversely affected and may see outflow, which could make the rupee more weaker against the dollar. A weaker rupee has an impact, indirectly, on inflation in India as it makes imports costlier.”
Electronics, automobiles and pharmaceuticals, among other industries, are majorly dependent on imports of raw materials. As the companies’ input costs may increase, their products may also see a rise in the prices. “But, that depends upon the fact whether companies are willing to pass on the high input cost or not, as increasing prices will affect their sales,” Sabnavis said.
The Indian domestic currency had on Wednesday plunged 18 paise to close at an all-time low of 78.22 against the US dollar. The rupee, however, rebounded on Thursday and strengthened by 15 paise to 78.07 against the US dollar, as the US Fed hike was in line with the market expectations.
Recently, companies across the sectors increased the prices of their products citing high input costs. Some of them resorted to reducing the weight of products rather than raising prices, so that sales are not impacted. In two months of April and May this year, FMCG major Hindustan Unilever Ltd (HUL) raised the prices of its goods two times citing rising input costs.
Crisil Chief Economist Dharmakirti Joshi said, “The rate hike was no unexpected. It was expected and at many places, it has already been factored in. Even the rupee has rebounded today.”
He said the Fed rate hike is not going to have a major impact on consumer prices in India for now. “It may have an impact in future depending upon how aggressive the US central bank gets to control inflation there.”
The retail inflation, based on the Consumer Price Index (CPI), in India stood at 7.04 per cent in May. Although it was lower than the inflation in April (7.79 per cent), it still remains above the RBI’s target limit of 2-6 per cent. Consumers in India are already paying higher prices for commodities, vegetables, oils and electronic items, among others. The inflation is likely to rise in the coming months, the RBI has said in its monetary policy statement last week.
An economist, who did not want to be named, told news18 that if US Fed raises its policy rates and the RBI doesn’t; in this case, the foreign portfolio investment sees higher outflows. So, the US Fed rate hike’s impact on the markets will also depend upon the RBI’s future actions. “For now, there is no direct impact of the US rate hike on consumer prices in India. There are multiple factors that affect prices.”
Soumyajit Niyogi, director of India Ratings and Research, said there will be a twin impact on the Indian economy. “The precipitous rate rise in the US should anchor commodity prices globally, which is favourable for India. On the other hand, a slowdown in US economy even if temporary, would adversely impact exports.”
Foreign investors have pulled out about Rs 14,000 crore so far this month. With this, the net outflow by foreign portfolio investors (FPIs) from equities reached Rs 1.81 lakh crore so far in 2022, data with depositories showed.
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