Where is US inflation headed?
What is the Impact on India?
RBI Remains Proactive
Since Mar ’21, when inflation was consistently breaching the Fed’s inflation target levels, the Fed
has not proactively reacted to it, and hence aggressive rate hike of 75bps from the Fed has calmed
the U.S markets for the time being. RBI has been quick to react on the evolving dynamics around
inflation and have proactively raised interest rates quickly enough post breaching the upper band
target of 6 percent of inflation.
Indian markets remains resilient
During the period Dec 2015 and Dec 2018, the Fed increased interest rates by 200 bps while during
the same period Nifty gained by 40%. As the below data suggested Indian market has remained
resilient most of the times when it comes to rate hikes. Market indeed rises after Fed hiked its
interest rates if one looks at historical data
Way ahead:
The pace of rise in global yields is narrowing the interest rate difference between India and US because of rapid hikes by the Federal Reserve. However, if one looks at the real interest rate spread between the US and India, India still remains attractive and this might bring some moderation in dollar outflows from Indian debt and equity markets. The USD/INR rate has been depreciating at a faster pace since Jan 2022.
There is a heightened threat of imported inflation coming from the currency route. Rising imports are widening current account deficit which would further put pressure on rupee. Forex reserves of India stands at $600 bn which provides a cushion for further downside in rupee as RBI has been intervening in the forex market to reduce volatility.
Investors looking for fresh investment into debt mutual funds can look at target maturity bond ETFs/ index funds maturing at different intervals depending on investors investment horizon.
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