Falling commodity prices may help India escape global inflation trap

The Reserve Bank of India (RBI) has said that India’s economy can escape the global inflation trap if the moderation in commodity prices seen in recent weeks continues, alongside an easing of supply chain pressures. .

“The biggest source of relief comes from inflation coming off its recent peak, albeit still at a high level,” the central bank said in its latest “State of the Economy” report. Nonetheless, signs of its widespread spread and the potential slippage in inflation expectations prompted a precautionary and early monetary policy response, the RBI said.

RBI Governor Shaktikanta Das had recently said inflation was likely to “gradually subside in the second half of 2022-23, ruling out chances of a hard landing in India.”. Earlier, Deputy Governor Michael Patra noted that there were signs of spikes in inflation and that tough policy may not be needed to contain price pressures.

If the moderation in commodity prices seen in recent weeks continues, alongside an easing of pressures on the supply chain, the worst of the recent inflationary spurt will be left behind, and the economy can escape the trap of global inflation and enjoy the fruits of soaring inflation. Supply response is unfolding, according to the RBI report.

While the US inflation rate hit a 41-year high of 9.1% in June, India reported retail price inflation of 7.01% in June, down slightly from at 7.04% in May and 7.79% in April.

“The international environment is hostile and therefore close and continued monitoring of the widening trade deficit and portfolio outflows is warranted, despite strong reserve cushions, external debt moderation and an exchange rate fairly priced that has withered less from the monotonous strengthening of the US dollar than many peers,” the report said.

Explain

Inflation moderation

While US inflation hit a 41-year high of 9.1% in June, India reported retail price inflation of 7.01%, down from 7.04% in May and 7 .79% in April.

The recent revival of the southwest monsoon and rejuvenated planting activity have raised hopes of another abundant year for agricultural activity, suggesting that rural demand will soon catch up with urban spending and will consolidate the recovery, he said.

Amid these developments, India’s financial sector remains strong and stable, the RBI said.

The ripple effects of geopolitical fallout are visible in several sectors, slowing the pace of recovery. However, there are sparks in the wind that ignite the economy’s innate strength and put it on track to become the world’s fastest growing economy, despite inflation fears, he said. -he declares.

In another report on the “Fed Cut and Indian Financial Markets”, the RBI said that the slight reaction of Indian financial markets to the announcement of the “Taper 2” can be linked to the strong position of the external sector of the countries during the announcement period. “However, there is evidence of strong spillovers from US stock and bond market volatility to Indian markets,” the RBI said.

This underscores the need to be ready among EMIs in terms of adequate buffers, contingent and data-dependent preemptive and calibrated policy responses to withstand future fallout from volatility, he said.

Food inflation is a major component of headline inflation and tends to spill over into the fundamentals. Food inflation was at a high level in 2013 compared to 2021.

The report said the Taper 2 announcement was somewhat anticipated by financial markets, given past experience with the Taper 1 and Fed communication that hinted at chances of tapping ahead of the announcement.

Another potential explanation for the resilience of Indian markets after the Taper 2 could be support from stronger economic fundamentals in India compared to the period before the Taper 1 announcement, the RBI said.

A lower current account deficit as a percentage of GDP, larger foreign exchange reserves and stronger economic growth during Taper 2 compared to the Taper 1 period imply that the Indian economy is in better shape to withstand the Fed tightening and manage any associated changes in volatility in financial markets, he said.

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