Stagflation risks in India low: RBI paper
RBI research paper. Inflation in India is more influenced by supply side factors and occasionally by demand, said the report published in RBI's latest monthly bulletin.
The empirical findings suggest supply-side shocks such as spikes in commodity prices along with tighter financial conditions and relatively higher depreciation of domestic currency are the major determinants of stagflation risk in India, concluded a paper written by Deba Prasad Rath, Silu Muduli and Himani Shekhar in a paper titled ‘Low’ Stagflation Risk in India’.
Growth and inflation, in such a scenario, could be impacted through multiple channels such as increased borrowing constraints for firms or large exchange rate pass-through effects on domestic prices.
When firms face higher borrowing constraints, they may respond by raising their prices. This, in turn, poses an additional risk of higher inflation as well as lower economic growth, the authors say.
The research assumes significance since delays in the monetary normalization process after the pandemic have also raised concerns about the potential for a costly stagflation.
As far as inflation is concerned another paper underscored that an evaluation of the relative importance of supply and demand factors driving inflation on a real time basis is a useful guide for the conduct of forward looking monetary policy.
The results indicate that, on an average, supply side factors are dominant in driving inflation in India, but demand factors also assume importance on occasions, according to a paper titled “ Recent Inflation Dynamics in India: Role of Supply vis-à-vis Demand” by Himani Shekhar, Vimal Kishore and Binod B. Bhoi.
