With an improvement in the economy and some degree of softening in inflation, the Reserve Bank of India (RBI) believes that the country is better placed to avoid the pitfalls of stagflation. India’s gross domestic product (GDP) growth for FY22 is estimated at 8.7%, which is above the pre-pandemic level. Retail inflation receded in May to 7.04%, but remained above the central bank’s upper tolerance limit.
Stagflation refers to a situation where inflation and unemployment are high, while demand remains stagnant in the economy.
With most constituents of the GDP surpassing pre-pandemic levels, domestic economic activity is gaining strength. The inflation print for May has brought some relief as it recorded a decline after seven months of continuous rise,” the RBI said in the State of the Economy article authored by a team headed by deputy governor Michael Patra.
In the midst of this increasingly hostile external environment, India is better placed than many other countries in terms of avoiding the risks of a potential stagflation,” said the article published in the RBI’s June bulletin.
In order to check price rise, the monetary policy committee (MPC) on two occasions, one in an off-cycle meeting in May and the planned meeting in June, raised the repo rate by 40 basis points (bps) and 50 bps, respectively.
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,” the central bank said.
At the global level, uncertainty looms due to rising commodity prices and volatility in financial markets. This will lead to significant monetary tightening as the advanced economies are tackling inflation while emerging market economies are grappling with global trade slowdown, capital outflows and imported inflation.