Despite the Indian economy’s resilience in the face of global headwinds and knock-on effects of geopolitical spillovers visible in several sectors, there are sparks in the wind that ignite its innate strength and set it on course to becoming the fastest-growing economy in spite of recession fears, according to an article in the latest issue of Reserve Bank of India (RBI) Bulletin.
The recent revival of the Southwest Monsoon and rejuvenation of sowing activity has raised hopes of another bountiful year for agricultural activity, raising expectations that rural demand will soon catch up with urban spending and consolidate the recovery, the article says.
“The biggest source of relief is from inflation coming off its recent peak, albeit at an elevated level still. Nonetheless, the signs of its generalisation and the potential unhinging of inflation expectations have elicited a pre-emptive and frontloaded monetary policy response,” it says.
“Amidst all these developments, India’s financial sector remains sound and stable. If the commodity price moderation witnessed in recent weeks endures alongside the easing of supply chain pressures, the worst of the recent surge in inflation will be left behind, enabling the Indian economy to escape the global inflation trap and enjoy the fruits of the ebullient supply response that is taking place,” it says.
In the wake of the pandemic and now the war in Ukraine, the Indian economy has faced repeated supply shocks, says another article in the Bulletin. Supply shocks are larger and unrelenting now, carrying the risk of unanchoring inflation expectations. They are also accompanied by a rebound in pandemic related revenge spending, it notes.
With limited policy space, frontloading of monetary policy actions can keep inflation expectations firmly anchored, re-align inflation with the target and reduce the medium-term growth sacrifice, it adds.
