The inflation concerns in the world's largest economy are sending shivers across the emerging markets. There are reasons to be worried about US inflation as any move to normalize the monetary policy in the US will lead to an outflow of dollars from emerging markets like India. Indian stock market has been the biggest beneficiary of global liquidity post the outbreak of the pandemic with foreign investors pouring in Rs 1.70 lakh crore, which was the highest inflows figure in the last decade. The hardening of inflation and also interest rates in the US will slow down the dollar inflows into the Indian stock market. In fact, a part of the hot money already invested in India will also go back to the US and other markets for risk-free returns. Any large outflow of dollars has the potential to weakens the currency value against the US dollar, fuel imported inflation, and also push interest rates higher in the domestic market. The inflation in the domestic market is already at an elevated level. BT analysis how India should prepare to handle this new risk, which comes from the monetary policy normalization in the US.
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