India better placed to avoid risk of stagflation: RBI officials

Domestic economic activity is gaining strength, write authors of Bulletin article

June 16, 2022 09:47 pm | Updated 09:59 pm IST - Mumbai

Reserve Bank of India (RBI) headquarters, in Mumbai. File

Reserve Bank of India (RBI) headquarters, in Mumbai. File | Photo Credit: PTI

India’s economy is better placed than many other countries to avoid the risk of potential stagflation, Reserve Bank of India (RBI) officials headed by Deputy Governor Michael D. Patra wrote in an article in the June edition of the RBI Bulletin.

“Global economic conditions continued to deteriorate as ratcheting up of commodity prices and financial market volatility have led to heightened uncertainty,” the officials wrote in ‘State of the Economy’. “Forecasts of global growth and inflation by various agencies paint a grim picture and it is increasingly becoming clear that in advanced economies, the war against inflation would entail significant monetary tightening, complicating the growth-inflation outlook,” they added.

“Emerging market economies grapple with the global trade slowdown, capital outflows and imported inflation. Some abatement of supply chain pressures and relaxation in lockdown measures by key industrial hubs have emerged as silver linings amidst the dark clouds looming over the global economy,” they observed.

India’s economy, however, was better placed to skirt the risks of a potential stagflation given that most constituents of GDP had surpassed pre-pandemic levels, domestic economic activity was gaining strength, and the CPI inflation print for May had recorded a decline after seven months of continuous rise.

“The recovery remained broadly on track. This demonstrates the resilience of the economy in the face of multiple shocks and the innate strength of macro fundamentals as India strives to regain a sustainable high growth trajectory,” they wrote.

The recent actions by the RBI, which demonstrated its commitment to price stability while supporting growth, augured well, they emphasised.

Highlighting that domestic economic activity had been gaining traction in spite of formidable headwinds from external developments, they said protracted war in Europe and the resulting sanctions had kept international commodity prices elevated while dampening global trade and growth.

Concurrently, the faster pace of monetary policy normalisation in response to record high inflation was heightening volatility in global financial markets, they said.

“In its June 2022 issue of the Global Economic Prospects, the World Bank has cautioned that the combination of feeble growth and elevated inflation raises the risk of stagflation with potentially harmful consequences for low and middle-income countries,” they pointed out.

“In the midst of these global adversities, the Indian economy is consolidating the path of recovery. Gross domestic product (GDP) for 2021-22 surpassed its pre pandemic (2019-20) level by 1.5%, and activity is gaining strength in 2022-23 so far as gauged from high frequency indicators,” they wrote.

In another article titled ‘What is the yield curve telling us about the economy’ the authors posited that the government securities yield curve contained important clues on the likely behaviour of the economy. “The yield curve is indicating an improvement in long-term growth prospects and an upshift in ex ante inflation expectations,” the officials wrote.

“At the same time, the fact that the yield curve has become steeper and concave reconfirms expectations of tighter monetary policy in the period ahead,” they added.

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