India’s RBI reports a lower risk of stagflation

  • 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?

Definition  An economic condition characterized by stagnant growth, high unemployment, and high inflation.
Indian contextFluctuating growth rates; periods of slowdown have raised concerns about stagnation.
Inflation Dynamics in IndiaAt times, historically high, often driven by rising food and gasoline prices.
Supply ShocksVulnerable to swings in global oil prices and agricultural supply shocks (e.g., monsoon variability).
Past EpisodesDuring 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.
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