“Threat Of Stagflation Is Transitioning Into Baseline Scenario”: Sources

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'Threat Of Stagflation Is Transitioning Into Baseline Scenario': Sources

Sources told NDTV that the threat of stagflation also looms large along with inflation

The “threat of stagflation is transitioning into a baseline scenario,” sources told NDTV and added that there are “no instruments globally against stagflation.”

A day ahead of April retail inflation, sources told NDTV that the Reserve Bank of India’s inflation forecast would likely be revised higher at the June Policy Review.

Last week, after an emergency meeting, the RBI hiked its key interest rates to fight runaway inflation even as they acknowledged the economic output loss from the pandemic would take India many years to recover.

Until last month, the central bank was focused on supporting the nascent economic recovery from the COVID-19-led restrictions on business activity , but has since shifted its policy plans to curb surging inflation.

While the Russia-Ukraine war has accentuated those growth concerns, it has at the same time caused runaway inflation globally, distorting supply chains which were already disrupted by the coronavirus-led lockdowns.

That points to a technical definition of stagflation – high inflation and slowing economic growth simultaneously.

A Reuters report shows Morgan Stanley has lowered its forecasts for India’s economic growth in the next two fiscal years, saying a global slowdown, surging oil prices and weak domestic demand would take a toll on Asia’s third-largest economy.

On Wednesday, people familiar with the matter told NDTV that the threat of stagflation also looms large along with inflation.

“In the words of Egyptian-American economist, ‘the threat of stagflation is transitioning into a baseline scenario’ globally,” the sources said.

And they added that there are “no instruments globally against stagflation.”

Still, the sources said, “aim to get rid of all pandemic-led policy measures.”

RBI governor Shaktikanta Das last week went to great lengths to justify that the off-cycle hike was a reversal of the emergency rate cut as a pandemic-support measure.

But spiralling inflation is a significant worry for the RBI at the moment.

A Reuters survey of economists on April’s retail price report showed inflation – based on the consumer price index – accelerated further to 7.5 per cent from a year ago, compared to a 17-month high of 6.95 per cent in March. 

And if the Reuters poll consensus of 7.5 per cent is realised, it would mark the highest inflation rate since October 2020 and well above the RBI’s upper limit of its 2-6 per cent target band for the fourth straight month.

Forecasts in that poll of 45 economists for the data, due to be released at 1200 GMT on May 12, ranged between 7.0 per cent and 7.85 per cent, underscoring expectations for a higher figure as none of the economists pencilled in a lower number than the March inflation rate.

General expectations suggest that the April report may be the peak, but inflation will likely remain elevated. 

Food inflation, which accounts for nearly half of the consumer price index basket, is already at a multi-month high due to higher vegetable and cooking oil prices and is likely to stay at those levels.

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