RBI's latest study says India's risk of stagflation is now 3%, despite rising prices
According to the latest Bulletin released by the Reserve Bank of India on Thursday, the likelihood of stagflation in India is now minimal, lying at a mere 3 percent, despite a notable increase in inflation.
Stagflation refers to a phenomenon in which an economy undergoes severe inflation, higher levels of unemployment, and slow or negligible growth.
The August Bulletin had an article discussing the 'State of the Economy', which highlighted the observation that the Indian economy is seeing a rebound in the second quarter of the fiscal year 2023-24 amidst the prevailing global stress.
The reduction in exports is being counterbalanced by domestic drivers, namely private consumption and fixed investment.
According to the article on 'State of the Economy', the increase in inflation observed in June underwent a transformation in July, as the unexpected impact on tomato prices extended to affect the cost of other crops.
According to the statement, although core inflation experienced a decrease, it is anticipated that headline inflation would maintain an average of over 6 percent for the second quarter.
The article has been written by a group of researchers, with Reserve Bank Deputy Governor Michael Debabrata Patra leading the effort. The Reserve Bank of India clarified that the opinions mentioned in the paper belong exclusively to the writers and do not reflect the official stance of the central bank.
In July, the consumer price index (CPI) indicated a notable increase in retail inflation, rising to 7.44 percent from the previous month's rate of 4.87 percent. This surge can be mostly attributed to the substantial price hikes observed in tomatoes, vegetables, and other food products.
In July, retail inflation rose to 7.44 percent from 4.87 % percent in the CPI ,due to price increases in tomatoes, vegetables, and other foods.
The essay highlights the significance of the fact that, despite the significant increase in inflation, the likelihood of stagflation occurring is currently minimal.
According to the World Bank, the report highlights that the Covid-19 pandemic, together with the situation in Ukraine, raised worries over stagflation, which refers to the simultaneous occurrence of economic stagnation and elevated levels of inflation.
Headline inflation would maintain an average of over 6 percent for the second quarter.
The risk has been further heightened in recent times due to weaker long-term global economic prospects and persistent inflation. The study highlights that there is evidence from 22 economies, with a particular focus on those that heavily depend on non-commodity exports.
This evidence suggests that the risk of weak economic growth and high inflation, especially in emerging market economies (EMEs), is influenced by two main factors: higher commodity prices and the appreciation of the US dollar.
Throughout its history, India has had many occasions where it has experienced the simultaneous presence of higher inflation rates and sluggish economic growth. According to historical analysis, some eras, including the Asian Crisis (1997-98), the Global Financial Crisis (2007-09), the taper tantrum (2013), and the COVID-19 pandemic, have been associated with higher risks of stagflation.
According to the report, the current likelihood of stagflation risk in India is minimal, standing at a mere 3 percent. This is attributed to an improvement of financial circumstances, the stability observed in the INR/USD exchange rate, and the consistent pricing of domestic gasoline.
Additionally, the report indicates that the high-frequency food price data for the month of August, up until the 14th, reveals a persistent upward trend in the prices of grains and pulses. The prices of edible oil experienced a sustained decrease during the months of July and August.
The average prices of tomatoes experienced a continued upward trend in the month of August. However, more recent data suggests a slight decrease in the rate of increase. Additionally, there were successive increases in the pricing of onions and potatoes.
In the month prior, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) maintained its projection of a 6.5 percent economic growth for the fiscal year 2023-24. The committee acknowledged that the domestic economy displays adaptability, as seen by robust local demand, despite the adverse impact of slow foreign demand. Furthermore, the prediction of inflation has been increased upwards by considering the recent price increases observed in the food category of the Consumer Price Index (CPI).
The primary modifications pertain to the estimations for the second and third quarters, while the prediction for the fourth quarter remains unchanged.
Based on the information provided in the article, it can be observed that the high-frequency food price data for the month of August, up until the 14th, indicates a persistent upward trend in the prices of grains and pulses. The prices of edible oil experienced a sustained downward trend over the months of July and August.
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