RBI: Risk of Stagflation in India Remains very Low
- ByStartupStory | August 19, 2023
The recent Bulletin from the Reserve Bank of India (RBI) has indicated that the risk of stagflation in India is currently very low, standing at only 3%, despite a noticeable rise in inflation. Stagflation, characterized by a combination of low GDP growth and high inflation, is not a significant concern at the moment. The ‘State of the Economy’ article in the August Bulletin highlights that despite the challenging global environment, India’s economy is gaining momentum in the second quarter of the fiscal year 2023-24.
The uptick in inflation in its June reading mutated in July, with the unprecedented shock to tomato prices spilling over to prices of other vegetables, said the article on ‘State of the Economy’. “While core inflation witnessed a moderation, headline inflation is expected to average well above 6% in the second quarter,” it said.
Factors like private consumption and fixed investment are helping counterbalance the negative impact of reduced exports. Although there has been a spike in inflation, particularly due to an unexpected surge in tomato prices that affected other vegetable prices, the article notes that core inflation has moderated. However, headline inflation is projected to remain above 6% during this quarter.
“It is noteworthy that despite the sharp pick-up in inflation, the risk of stagflation remains low at the current juncture”, the article said.
The article, authored by a team led by RBI Deputy Governor Michael Debabrata Patra, emphasizes that the views expressed are those of the authors and not necessarily reflective of the RBI’s stance. Despite consumer price index-based retail inflation rising significantly to 7.44% in July from 4.87% the previous month, primarily due to escalating food prices, the risk of stagflation is still considered low.
The Covid-19 pandemic and the situation in Ukraine raised concerns about stagflation, which is a combination of economic stagnation and high inflation, as noted by the World Bank. The risk has become more pronounced due to weaker long-term global growth prospects and persistent inflation. Among the 22 economies analyzed, those heavily reliant on non-commodity exports are particularly vulnerable to the interplay of higher commodity prices and a stronger U.S. dollar, leading to weak growth and high inflation.
Currently, however, stagflation risk remains low for India with a probability of only 3% with the easing of financial conditions, stability of the INR/USD exchange rate, and steady domestic fuel prices,” the article said.
India has faced instances of high inflation and low growth occurring simultaneously in its history. The article points to specific periods like the Asian Crisis (1997-98), the Global Financial Crisis (2007-09), the taper tantrum (2013), and the Covid-19 pandemic. Nevertheless, the current stagflation risk for India is deemed low, attributed to favorable financial conditions, a stable INR/USD exchange rate, and consistent domestic fuel prices.
Additionally, the article highlights that high-frequency data for food prices in August (up to the 14th) reveals a continued increase in the prices of cereals and pulses, while edible oil prices have declined during July and August.
Follow Startup Story
Related Posts
