US inflation impact: Global recession fears to cool WPI inflation in India

Impact on CPI inflation to come later, rupee depreciation to negate some of this impact

Wholesale price inflation in India likely to dampen as 40-year high retail price inflation in the US may stoke fears of global recession via expected further monetary tightening by the Federal Reserve. The impact of global factors on retail price inflation will come with a lag effect.

However, the rupee depreciation will negate part of this effect due to expected capital outflow to safer places following recession fears and likely rate hikes by Fed, leading to higher returns for capital there. The rupee was trading at 79.80 against the US dollar in the morning trade on Thursday, compared to its close of 79.64 on Wednesday.

Crisil chief economist D K Joshi said easing of global commodity prices will cool off the wholesale price index-(WPI) based inflation more than consumer price index-(CPI)-based inflation. According to his estimates, global factors now contribute 60 per cent of WPI inflation against the historical trend of 30 per cent.

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"Contribution of global factors to CPI inflation is much lower so it will take longer to cool off," he said.

However, aggressive tightening by the US Federal Reserve will put pressure on the rupee, offsetting some gains from the recent decline in global commodity prices. "The impact will depend on how much the rupee weakens and how long it stays there. The past episodes of sharp depreciation tell us that while the rupee took a dive versus the dollar below its long-term trend, it also corrected when the risks subsided," Joshi said.

He said the evolving scenario is very complex with too many moving parts.

ICRA chief economist Aditi Nayar said with the spike in US inflation, expectations of aggressive monetary tightening are likely to drive further slowdown fears, dampening commodity prices.

"In the Indian context, this should translate into lower WPI inflation faster, with a relatively slower transmission to the retail inflation," she said.

In addition, the trends in the domestic services inflation need to be watched, given the high demand in this category.

Sakshi Gupta, principal economist, HDFC Bank Treasury said the rise in US inflation could imply sharper rate increases by the US Fed -- as much as 100 basis points in the next policy -- increasing the intensity of recession fears.

"The resulting impact on commodity prices and lowering domestic inflation could outweigh the "rupee depreciation" effect for India --- being a net positive from an inflation perspective in the near term," she said.

QuantEco Research principal economist Yuvika Singhal said the price of most commodities has moderated in recent weeks on account of market participants factoring in the risk of a marked slowdown in the global demand on account of aggressive monetary tightening in many countries with the Fed leading the pack and amid signs of resurgence in Covid cases in a few countries.

However, the risk from exchange rate depreciation is gradually emerging, she said, while expecting further weakness of the rupee towards 81 against the dollar. "While this could raise the spectre of imported inflation in the coming months, we believe the magnitude would be moderate (with 15-20 incremental impact on headline CPI inflation," she added.

Overall, she said, inflation's upside and downside risks will balance each other.

However, Bank of Baroda chief economist Madan Sabnavis said WPI might start cooling as global prices of metals, chemicals etc., come down, but local factors will drive CPI.

The inflation in the US is different from that for us. We have seen prices go up because producers are passing on higher input costs. Food inflation is high due to factors of production (supplies), seasonal factors, imported (oils), and food processed (higher input costs). Services are more expensive as re-pricing has taken place. Therefore, our inflation is being driven by a different set of factors," he said.

Rahul Bajoria, MD & chief India economist at Barclays also said the ratcheting up of expectations of a more front-loaded hiking cycle in the US would have a negative impact on risk sentiment, and this is clearly showing in both bond yields and the Rupee.

"Still, India’s asset prices will be driven by India’s economic fundamentals over the medium term,” he said.

Consumer prices in the US soared 9.1 per cent in June as against a year earlier, the biggest yearly increase since 1981.

In India, CPI inflation eased only marginally to 7.01 per cent in June from 7.04 per cent in the previous month, and WPI inflation eased slightly to 15.18 per cent in June from a three-decade high of 15.88 per cent in May. 

June was the sixth month in a row when the retail price inflation remained above the upper tolerance level of six per cent mandated for the monetary policy committee.