- Officials from the Reserve Bank of India (RBI) have revealed that the risk of stagflation in India has been reduced to 1%, down from 3% in August.
What is Stagflation?
| Details | |
| Definition | An economic condition characterized by stagnant growth, high unemployment, and high inflation. |
| Indian context | Fluctuating growth rates; periods of slowdown have raised concerns about stagnation. |
| Inflation Dynamics in India | At times, historically high, often driven by rising food and gasoline prices. |
| Supply Shocks | Vulnerable to swings in global oil prices and agricultural supply shocks (e.g., monsoon variability). |
| Past Episodes | During the Asian Crisis, Global Financial Crisis, taper tantrum, and COVID-19 pandemic, elevated stagflation risks were observed. |
Assessing Stagflation
- A Two-Pronged Approach: The RBI evaluated the issue using two methods: examining periods of low economic growth with high inflation and implementing ‘at-risk’ frameworks, notably “Inflation at Risk” (IaR) and “Growth at Risk” (GaR), both of which used quantile regression.
- Factors causing stagflation: Supply-side shocks, increases in commodity prices, tighter financial conditions, and currency devaluation have all been identified as important factors.
India’s Major Risk Factors
- Financial circumstances and Rupee Depreciation: Financial circumstances and the rupee’s depreciation versus the US dollar are important risk factors for India’s stagflation.
- Empirical Evidence: Although the impact of crude oil prices on domestic fuel costs has limited predictive ability for stagflation, the combined IaR and GaR frameworks verify these findings.
- Global Issues: Following the outbreak, increasing commodity prices and the strengthening of the US currency fueled concerns about global stagflation.
Source: https://economictimes.indiatimes.com/news/economy/indicators/stagflation-risks-in-india-low-rbi-paper/articleshow/106159439.cms