Home / Opinion / Views /  The Fed’s gear shift

A major shift in the US Federal Reserve’s reading of inflation in America, from characterizing it as “transitory" till recently, to worrying about its persistence for too long above its tolerance limit of an “average 2%", has pushed it to wind back its covid stimulus far faster than it had planned. The price upshoot has been compared by critics with flare-ups of the 1970s, after which the supply of money had to be tightened severely for the sake of stability. The Fed now intends to end its bond-buying programme by early next year instead of mid-2022, which would set the stage for three successive quarter-point policy rate increases during the rest of the year. If inflation pressures don’t ease, perhaps there will be even more hikes to come.

While India’s retail price rise is still within our central bank’s comfort zone of 2-6%, we could similarly be caught by surprise on the inflation front. Yet, what the Reserve Bank of India may need to watch most closely over the next few weeks is the likely impact of a set-to-shrink rate differential between the US and India on capital flows. Exiting money would push the rupee down and raise the cost burden of inelastic imports. But a currency prop could be costly too.

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