Inflation has been the talk of the town for the past one year. Still, we are not done with talking and taking necessary measures to protect ourselves from the adverse effects of inflation. However, RBI is also on its way to keeping a tune with US macroeconomic actions, as Indians' economic actions have always been in parallel with US measures.
Since the US is all set to fight an active war against inflation by hiking the federal fund's rates by 75 bps to 3% to 3.25%, India is also set to hike the interest rate by 50 bps. Where federal funds rate is the rate at which one commercial bank lends its excess funds to another commercial bank. US measures are hurting the Indian economy moderately in various aspects.
Let's understand the factors that are affecting the Indian economy and why you should be concerned about it:
Import will get expensive
Due to a massive increase in globalisation culture, we are so dependent on trading activities with the US as the country has the potential to create a more pronounced domino effect across different regions because of its strong currency value.
Indians will also not be left untouched by its effects. India may import more inflation due to rising domestic costs for raw materials and other imported commodities as a result of rising global prices. When the cost of goods rises, commodity prices will rise automatically, which will cause, furthermore, inflation in the country.
US money control measure
The US is constantly trying to curtail inflation by tightening its monetary policy. Higher interest rates will result from this. Higher interest rates make it more profitable for people to keep their money in savings accounts while making borrowing less appealing, or we can say borrowing becomes more expensive.
The outflow of foreign investors from India
When it becomes more attractive to invest in a foreign country than in India, foreign investors will park their money in the US only instead of staying invested in India. However, according to experts, the further outflow of foreign investment is unlikely as we know RBI keeps its monetary policy in parallel with the US. The RBI might raise its interest rates as a result of this behaviour. A rise in interest rates in India also results in less money being in use, which suggests that the rupee becomes more expensive and the value of the currency increases.
Hurting export sector
One of India's main trade partners, the US, has a market share of 18.1% of India's exports of goods in FY22. India is hence susceptible to a US economic downturn. India's software exports are anticipated to suffer the most. The constant decrease in the value of export and increase in the cost of imports will worsen the trade deficit severely.
These are a few ways how the Indian economy and market gets affected by the US economy. All emerging economies are facing the same level of inflation issues as the US is facing right now. At present, India's inflation level is at 6.2%. What we can do as retail investor is to have patience with our money and focus on the skill of value investing.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com
Disclaimer: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment-related decision.