US inflation impact on India
In the second half of 2021, numerous economies, notably India, turned inflation into the second-most popular buzzword after COVID-19. US Inflation is the most concerning of all the nations because it has the potential to have a more noticeable domino impact on all of the rising economies. We provide a straightforward explanation of what led to the soaring US inflation and its impact on India because the US is now preparing to conduct an open war against inflation.
The US Inflation: Picture to Understand
In December 2021, the US inflation rate broke a four-decade trend and hit an all-time high of 7% year-over-year (YOY). The original reason for its upward trend was that, like other nations, the US experienced supply chain problems due to the historic lockdown and stop in economic activity caused by the Covid-19-induced lockdown.
As a result of these disruptions, input costs increased, which in turn led to higher consumer prices & rising inflation. For this reason, the Fed has always argued that supply-chain distortions are to blame for the temporary nature of inflation in 2021.
But why are economists hesitant to label this as temporary or supply-led inflation? Because it is impossible to ignore the influence of demand. Following the slowdown in economic activity that occurred during lockdowns, the economy quickly recovered thanks to monetary and fiscal assistance.
Because of this, the households had more money to spend. Additionally, customers spent more on commodities because service industries like travel, hotels, entertainment, and restaurants were shut down.
As a result, there was a rise in the relative demand for commodities. This US inflation may persist since it is driven by both supply and demand.
Can this US inflation be stopped soon?
Is it possible to stop this US inflation soon? is the important question to ask. Given the widespread US labour market shortages, the slow pace of China’s economic recovery, and the unknowns surrounding the upcoming Covid-19 waves, this is difficult to anticipate.
The demand for labour in the US has been significantly greater than the supply ever since the later part of 2020. This indicates that labour costs, or nominal pay rates, have been rising. Due to this, businesses are now charging consumers more for their products in order to offset the rising labour costs.
American labour force participation has not yet returned to their pre-pandemic levels, despite the increase in job vacancies. It is predicted that this situation would prolong and contribute to rising inflation.
How does US inflation impact the Indian economy?
US inflation impact on India was evident as Inflation in the Indian economy reached 5.59 percent (YOY) in December 2021. India may import more inflation due to rising domestic costs for raw materials as well as other imported commodities as a result of rising global prices.
Moreover, if the Fed attempted to lower US inflation, the results would be different. It will seek to do this by tightening monetary policy and regulating the amount of money in circulation. Higher interest rates will result from this.
How? In contrast to lower interest rates, higher interest rates make it even more profitable for people to put their money in savings accounts and make borrowing less appealing.
This US inflation could impact the Indian economy. The US’s rising interest rates may entice foreign investors to keep their money there. In economics, this phenomenon is known as the “beggar-thy-neighbour effect.” In light of this behaviour, RBI may raise its interest rates too.
Because there is less money moving across the economy in India when interest rates rise, the rupee is assumed to become more expensive and grow in value.
The export industry would experience difficulties from a stronger rupee, which might ultimately harm both export revenues and the overall GDP. As a result, the central government may oppose this policy decision. US inflation impact on India will also cause loss of possible funding for Indian entrepreneurship prospects.
India, alongside other developed and emerging countries, is currently seeing inflation tendencies that are comparable to those in the US due to the current level of globalisation. We also bear in mind that the Indian economy is projected to grow at 9.2% (here) while allowing for the existing patterns in inflation, which is how US inflation can have an impact on India.
Will US inflation cause Recession in the IT sector 2022?
Software firms in the US are predicted to cut their spending by 5% to 6%, which will directly affect the number of deals with Indian IT firms like TCS, Infosys, Wipro, and others.
Market analysts predict that the high attrition rates in the Indian IT industry over the coming two to three quarters will be dampened by concerns about the approaching global recession in IT sector 2022 and a wave of start-up layoffs, even though the majority of significant IT sector announced a loosening of supply side pressures mostly in September quarter.
Infosys’s high attrition rates had formerly frightened analysts, showing lower attrition of 27.1% in the recently ended quarter compared to 28.4% in the June quarter.
Tata Consultancy Services (TCS) reported that its LTM, or Last Twelve Months, attrition in the IT services sector increased slightly to 21.5%, although the company was quick to emphasise that it will start to see the turbulence “stabilise” in the coming months.
According to JPMorgan, in the longer run, IT company profitability would continue to suffer. The sector’s outlook has grown more pessimistic.
Conclusion-US inflation impact on India: Recession in IT sector 2022
Economic analysts have flashed warnings about upcoming recession risks and global market shocks as a response to the storm clouds looming over the world economy.
There would be a tiny but certain effect on the Indian economy from indications of US inflation and impending recession in the IT sector 2022 in other nations including the UK, Australia, New Zealand, Taiwan, and the Philippines.
The effects will be more noticeable in the IT sector, which receives 40% to 78% of its income from clients abroad.
We can clearly see that US inflation has caused recession in the IT sector as various US-based firms, including several IT companies, together fired thousands of workers in 2022 alone and put the brakes on hiring.