Reserve Bank of India (RBI) officials imagine the danger of stagflation — a portmanteau of financial stagnation with excessive inflation — has lowered additional to 1% in contrast with 3% in August based mostly on obtainable knowledge, utilizing two approaches.
In the primary method, stagflation threat was assessed based mostly on phases of decrease financial progress coinciding with excessive inflation. The second method used the ‘at-risk’ frameworks i.e., “Inflation at Risk” (IaR) and “Growth at Risk” (GaR) by using quantile regression to evaluate the probability of stagflation.
“Based on data spanning from Q1:1996-97 to Q2:2023-24, empirical findings suggest that supply-side shocks such as spikes in commodity prices coupled with tighter financial conditions and relatively higher depreciation of the domestic currency turn out to be the major determinants of stagflation risk in India,” wrote the officials Deba Prasad Rath, Silu Muduli and Himani Shekhar in the most recent version of the RBI Bulletin.
The RBI stated that the views expressed in the Bulletin are of the authors and don’t characterize its views.
“Elevated risks of stagflation were experienced during specific episodes like the Asian Crisis, the Global Financial Crisis, the taper tantrum, and the COVID-19 pandemic. Latest estimates, incorporating data up to Q2:2023-24, however, assign a very low probability of only 1% to the risk of stagflation,” they stated in the chapter ‘Low’ Stagflation Risk in India.
In August, the RBI officials had acknowledged that stagflation threat for India was with a likelihood of 3% with easing of monetary situations, stability of INR/USD trade price and regular home gasoline costs.
Stating that stagflation had the potential to destabilise all the macroeconomic framework of an economic system by creating an atmosphere of uncertainty, they stated it was a serious concern for the RBI because it was entrusted with the first goal of sustaining value stability whereas preserving in thoughts the target of progress requiring fixed monitoring of any arising stagflation threat.
Further, greater commodity costs and the appreciation of the U.S. greenback post-pandemic raised considerations of stagflation globally. The delays in the monetary-normalisation course of after the pandemic have additionally raised considerations concerning the potential for a pricey stagflation, they noticed.
Identifying two important threat components for stagflation in India particularly monetary situations and depreciation of the rupee in opposition to the U.S. greenback, they stated these components prominently influenced the probability of stagflation as corroborated by the empirical estimates.
“Similar results after using the integrated IaR and GaR frameworks to evaluate the stagflation risks adds further credence to our findings. However, given the weak pass-through of crude oil prices to domestic petrol and diesel prices, it has limited predictive power for stagflation,” they held.
“Compared to the historical episodes, stagflation risk is currently lower at about 1% which could be attributable to several factors. Commodity price shocks are not as severe and persistent as they were back then,” they acknowledged.
“Moreover, given the focus of central banks on maintaining price stability worldwide and healthier financial positions of financial institutions, the long-term inflation expectations have largely remained well-anchored to the inflation target unlike during the 1970s when inflation expectations were weakly-anchored and went to exorbitantly high levels,” they added.
Highlighting that numerous components such because the COVID-19 pandemic, geopolitical tensions, lockdowns in China, and provide chain disruptions, had contributed to this case, they nonetheless stated in contrast with the stagflationary interval of the Seventies, at the moment the danger of stagflation was decrease attributing to beneficial macroeconomic situations.
Encouragingly, the estimated outcomes point out that current enhancements akin to eased monetary situations, reasonable home foreign money depreciation and steady crude oil costs have helped cut back the danger of stagflation in India, they acknowledged.
Data over the previous 20 years point out that India skilled the next threat of stagflation throughout international monetary crises, the taper tantrum, and the COVID-19 pandemic. It witnessed an financial slowdown in a number of phases; nonetheless, it witnessed inflationary pressures for a protracted interval in the course of the Global Financial Crisis (2007-08), they stated.
A good home financial coverage and sluggish international progress might need led to the financial slowdown in 2011. The uncertainty and capital outflows ensuing from the taper tantrum in 2013 additionally impacted India’s financial progress momentum.
CPI inflation was above 10 %in just a few months which along with weak progress led to a stagflationary state of affairs. The emergence of the COVID-19 pandemic and elevated inflation in 2020, though for a brief interval, raised the danger of stagflation, they acknowledged.
They opined that the stagflation threat arising publish COVID-19 had subsided reflecting easing of monetary situations, contained depreciation of the INR/USD trade price and steady home petrol and diesel costs.
