Stronger dollar will add to inflation

MUMBAI: As the rupee hit a new low of 78. 28 in intraday trade and closed below the 78 level for the first time, bankers say that even if the currency of India’s trading partner has depreciated along with the rupee, imports would still be costlier as billing is in dollars, and most importers do not have bargaining power. On Friday, the US reported inflation at 8. 6% in May, the fastest since December 1981.

The trigger for the increase in prices was the shortage caused by the Russian invasion of Ukraine and China’s lockdowns. “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 Ashhish Vaidya, head of treasury and markets at DBS Bank. According to Vaidya, higher interest rates could trigger a recession because of the high level of borrowing globally. Inflation may sober down a bit, but it is not going away in a hurry,” said Vaidya. The increase in the value of the dollar will make all imports expensive. It will add to inflation.