High Inflation in the US has had a repercussion on the Indian Rupee too, according to former RBI Governor C Rangarajan, who is also the Chancellor of The ICFAI Foundation for Higher Education (IFHE), Hyderabad. He was delivering a lecture virtually at a seminar organised by ICFAI on inflation and its control.

“Due to high Inflation, the US Fed increased the interest rates. This made the US market attractive to investors from the US, who exited the Indian market to invest their capital in the US. This led to the fall of the rupee against the US dollar” he further explained. He also noted that the steps required to control inflation are the same as those needed to control depreciation in the rupee value.

Inside inflation

In his lecture, Rangarajan spoke about the theoretical underpinnings of inflation, behaviour, and steps to contain inflation. He said that inflation does not mean an increase in prices of select commodities but an increase in general prices. Discussing the two significant theories of Inflation— demand-pull Inflation, and cost-push Inflation, he quoted theorists who said, inflation is both cost-pushed and demand-pulled, and others who said one type of inflation leads to another.  

Further, Rangarajan addressed the audience about inflation in India and said that inflation has been fluctuating and reached 6.8 per cent by October 2022, which was beyond the comfort zone. He said that the government has brought down the repo rate during the pandemic to stimulate the economy and improve liquidity. With inflation growing, the repo rate was raised, and with the increase, all other interest rates in the system also increased. Consequently, there was tightening of credit.  

Unintended consequences

Rangarajan also said that though the recent increase in inflation was attributed mainly to increasing oil prices in the wake of the ongoing Russia-Ukraine war, it is just a partial explanation.

Rangarajan further added that inflation has now become a worldwide phenomenon, and in the US, inflation reached 9.1 per cent in June 2022, a magnitude that was not witnessed in several decades. Even the UK is facing high inflation, which was beyond 11 per cent in October 2022. He said that there is a common factor that led to rising inflation across the world, which was Covid-19.

At that time, every country was advised to increase the government to stimulate the economies operating at a low level. In the US, practically every household was given money, leading to an increase in government expenditure and a high fiscal deficit. The same is seen in other countries, including India. The general price level increased, causing Inflation.