The Reserve Bank of India (RBI) in its July 2022 bulletin released Saturday said the Indian economy has been resilient in the face of global recessionary concerns and the consequences of the Ukraine-Russia war.
Relative to the global economy, the outlook for India’s economy is bolstered by the recent revival of monsoons, the pick-up in manufacturing and services, stabilisation of inflation pressures and strong buffers in the form of adequate international reserves, sufficient foodgrain stocks and a well-capitalised financial system. These factors strengthen the conditions for a sustainable high growth trajectory in the medium-term, it added.
With respect to the actions taken by RBI’s rate-setting panel to mitigate supply-driven inflation, the central bank said the monetary policy committee’s (MPC’s) actions have attracted a lot of attention in the wake of the current global inflationary episode.
The role of monetary policy in response to supply-driven inflation has attracted a lot of attention in the wake of the current global inflationary episode.
“When a supply shock is transitory, inflation returns to the equilibrium without the need for any monetary policy action and it can look through its initial impact as it lies outside its realm and remit. However, repeated supply shocks generate second-round effects necessitating pre-emptive monetary policy action. When the economy is going through a contractionary phase, an adverse supply shock can worsen the monetary policy trade-off, as it can ill afford to weaken demand conditions further by responding to the inflationary impact of the supply shock. Under an adverse supply shock, by frontloading monetary policy actions, credibility is demonstrated by showing commitment to the inflation target. This will anchor inflation expectations, necessitating less aggressive policy increases in future and, therefore, a lower growth sacrifice,” it added.
The RBI bulletin further said US Federal Reserve’s taper in 2021 was less severe compared to the 2013 taper tantrum.
“Empirical analysis using a GARCH framework suggests a muted impact of Taper 2 announcement on financial market volatilities which could be a result of India’s stronger external position in 2021 as compared to 2013,” it added.
