With the economy improving and some degree of inflation slowing, the Reserve Bank of India (RBI) believes 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 pre-pandemic levels. Retail inflation declined to 7.04% in May, but remained above the central bank’s tolerance limit.
Stagflation refers to a situation where inflation and unemployment are high while demand in the economy is stagnant.
With most components of GDP above pre-pandemic levels, domestic economic activity is gaining momentum. Inflationary pressures for May have eased some as they have eased after seven months of continued gains,” the RBI said in its article on the state of the economy, written by a team led by Vice Governor Michael Patra.
In the midst of this increasingly hostile external environment, India is better positioned than many other countries in avoiding the risks of potential stagflation,” the article published in the RBI’s June bulletin said.
To monitor the price increase, the Monetary Policy Committee (MPC) has raised the repo rate by 40 basis points (bps) and 50 bps, respectively, on two occasions, one in an off-cycle meeting in May and the scheduled meeting in June. †
Overall, the recovery remained 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 is looming due to rising commodity prices and volatility in financial markets. This will lead to significant monetary tightening as advanced economies tackle inflation, while emerging market economies struggle with the slowdown in global trade, capital outflows and imported inflation.