A tighter Fed poses the risk of capital outflows from India, along with the associated worries over exchange and interest rates. The rupee may depreciate, but this would correct the strength in the real effective exchange rate over the years, and improve the competitiveness of Indian exports. Imports will become costly. RBI must assess the rupee depreciation against the risk of imported inflation. It should work together with GoI to maintain macroeconomic stability and prepare the markets to prevent any undue volatility.
Crude prices have come down. But inflation is still driven mainly by input prices, rather than excess demand. Containing inflation calls for fixing supply bottlenecks and avoiding curfews. Most states have imposed curfews due to worries over Omicron‘s spread. Supply chains will get disrupted once again and derail economic recovery. States must focus on pandemic control, not lockdowns. GoI must also spend more to speed up economic activity to absorb any shocks.