Experts expect some inflation, CAD relief after US Fed hikes rates

Following the US Federal Reserve's decision to raise its key benchmark interest rate by 75 basis points, India may see some relief in terms of retail price inflation and current account deficit (CAD) in the current fiscal year (bps).

Retail inflation in June stayed over the Reserve Bank of India's target of 4%, plus or minus 2%, for the sixth consecutive month, though it softened to 7.1% from 7.04 per cent in May. Lower commodity prices should take some of the stings out of the monthly trade deficit figures. In June, the country's trade deficit reached an all-time high of $26.18 billion, up from $24.29 billion the previous month. The deficit increased to $70.8 billion in the first quarter of the current fiscal year, more than double from $31.42 billion the previous year. This is anticipated to increase the CAD to at least 3% of GDP in the current fiscal year, up from 1.25% the previous year.

According to Madan Sabnavis, chief economist of Bank of Baroda, there are indicators that this is not the final rate hike by the US Fed and that one should be prepared for future strong moves.

According to Sakshi Gupta, principal economist at HDFC Bank Treasury, the US Fed

The MPC, which is slated to convene next week, is likely to be swayed more by local inflation-growth dynamics than by the US Fed's move, analysts said, even though the measure has narrowed the interest rate differential between the US and India.

Given the current position, Sabnavis does not anticipate any unpleasant surprises from the MPC. "It will consider Fed actions, but it will be influenced more by domestic inflation, which appears to be stable at 7%," he said.

He predicts the MPC will raise the repo rate by 25 basis points at its review meeting next week, which is less aggressive than the previous hikes of 50 basis points in July and 40 basis points in an off-cycle meeting in December.