A stronger dollar could make India’s inflation fight tougher

In intraday trade, the rupee hit a new low of 78.28 and closed below the 78 mark for the first time. The inflation in the United States surging to record levels of 8.6% in May, the highest level since December 1981, will make the Fed more aggressive in its action.

This will fuel an outflow of funds from emerging economies and put pressure on the local currency, thereby making imports costly.

India’s retail inflation moderated slightly in May to 7.04 per cent while the wholesale prices hardened further to nearly 16 per cent.

Global geopolitical uncertainties due to a protracted Russia-Ukraine war has stoked fears of inflation accelerating further and making the fight against rising prices difficult.

“The weakening of the currency is not India-specific, the rupee has still outperformed. The 8. 6% US inflation has spooked the markets. The market is expecting a sharper and faster increase in interest rates to bring real rates (interest adjusted for inflation) close to neutral,” said Ashish Vaidya, head of treasury and markets at DBS Bank.

A recession might be induced if there’s a large level of borrowing globally; and increased interest rates. “Inflation may moderate a little, but it is not going away any time soon,” Vaidya added.

While as per the bankers, even if India’s trading partner’s currency has dropped in tandem with the rupee, imports will still be more expensive because billing is done in dollars, and most importers lack bargaining strength.

So far this year, after a 40 basis point increase in May, the RBI raised the policy repo rate by 50 basis points to 4.90 percent in June.

The MPC decided to keep its focus on removing accommodation. These actions are in line with the goal of maintaining growth while meeting a medium-term target for consumer price index (CPI) inflation of 4% within a 2-percentage-point range.