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The Labor Department announced the inflation data in the US which revealed that it reached an all-time high of 9.1% in the month of June, the highest inflation recorded in the country since 1981.
The country recorded 8.6 % in the month of May. However, the expectations for the same were at 8.8% in the month of June.
“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,” Vivek Kumar, an economist at QuanEco said.
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Earlier this year, the Federal Reserve increased the interest rates by 75 basis points (bp) in order to tame inflation. Talks are that rates are to be increased in the upcoming Federal Open Market Committee (FOMC) meeting, which is scheduled to take place on July 27.
“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.
How does it impact India?
The impact will be in three possible ways: firstly, since the differential interest rate between India and US is narrowing, less preference would be given to India for the currency carry trade.
Second, the yield in the US debt markets could drive foreign investors from investing in India and churning their investment to US 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 a BoP deficit of 1%of GDP could continue to keep the rupee under moderate pressure. We expect the rupee to depreciate towards 81 levels before the end of FY23,” Kumar said.
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