India is better positioned to prevent stagflation, says RBI

17 Jun 2022 , 10:36 AM

Even as stagflation threats loom over certain major global economies, notably the United States, the Reserve Bank of India (RBI) says India is better positioned to avoid such a risk in its monthly ‘State of the Economy’ report issued on Thursday (16-06-2022).

“In the face of an increasingly hostile external environment, India is better positioned than many other nations to escape the hazards of probable stagflation,” according to the paper.

At least 83 percent of investment managers polled by Bank of America Research this month believe the global economy is at risk of stagflation, which is defined as increasing inflation combined with slowed economic growth.

However, the RBI data depicts a positive picture of economic activity gaining traction, with most GDP elements exceeding their pre-pandemic levels. “The recuperation stayed on pace for the most part. As India attempts to recover a sustained high-growth trajectory, this highlights the economy’s resilience in the face of many shocks and the inherent strength of macro fundamentals,” according to the research.

“With an annual growth rate of 8.7% in 2021-22, India’s GDP surpassed its pre-pandemic (2019-20) level by 1.5 percent, and the recovery has been strong so far in 2022-23,” it continues.

While the comeback in growth is positive, the country’s inflation situation remains dire. Headline Inflation based on the Consumer Price Index (CPI) has stayed over the RBI’s upper tolerance range of 6% for all five months of 2022. The central bank boosted the policy repo rate by 90 basis points to 4.9 percent in just over a month, in response to the strong rise in inflation.

“In this environment, the RBI’s recent moves, which underlined its commitment to price stability while boosting growth, bode well,” the paper reads.

“The inflation print for May has offered some relief as it has registered a reduction after seven months of continuous rising,” the report notes of 7.04 percent inflation in May.

The present surge in inflation, which is mostly due to a conflict in Europe, is outside the RBI’s jurisdiction and competence, according to the study. Simultaneously, the central bank must take steps to limit the second-order effects of price increases.

“The RBI’s inaction will be perceived as accommodating the inflation shock, and this perception may lead to the belief that inflation is out of control,” the report says, adding that an increase in interest rates and tightening of monetary and liquidity conditions will help to bring inflation under control.