Asian Development Bank (ADB): India may suffer ‘imported inflation’

The Asian Development Bank recently published a cautious note about India’s vulnerability to imported inflation as a result of potential currency depreciation amid rising interest rates in the West.

What is Import Inflation?

  • Imported inflation is the rise in the prices of products and services within a country as a result of an increase in the cost or price of imports.
  • This phenomena happens when variables such as a declining currency, increasing import costs, or rising international pricing cause increased expenses for imported products and services.
  • As a result, producers may raise their prices to offset these increased costs, causing inflationary pressures in the local economy.
  • This hypothesis is related to the theory of cost-push inflation, which states that when input costs rise, so do final product prices.

Reason for imported inflation:

  • Capital flows: Increased interest rates in Western nations attract overseas investors seeking greater returns, resulting in capital outflows from countries such as India and the probable depreciation of the Indian rupee.
    • When a currency depreciates, local consumers need more of their own currency to buy foreign items, which raises import prices.
  • Borrowing Costs: If Indian firms and governments raise cash in foreign currency-denominated international markets, their borrowing costs for infrastructure projects and investments may rise.
  • Inflationary Pressures: Capital outflows can put pressure on the Indian rupee, generating imported inflation as the cost of imported commodities rises as the currency falls.
  • Exchange rate variations caused by changes in Western interest rates have an impact on India’s trade competitiveness, affecting exports, imports, and domestic demand. 

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