Tightening fiscal and monetary policies can, however, address inflation only from the demand side. Simultaneously, from the supply side, trade disruptions, export bans and the resulting surge in global commodity prices will continue to stoke inflation if Russia-Ukraine conflict persists, and global supply chains remain un-repaired. The world is looking at a distinct possibility of widespread stagflation. For now, there has been an exception: India, where the risk is lower for India than other countries.
Compared to other nations, even among the advanced economies, India is relatively better prepared to handle external shocks that could be created by the tightening of the monetary policy stance. In its policy meeting in Aug, The Reserve Bank of India (RBI) kept the growth forecast at 7% for FY23 despite disruptions due to geo-political tensions.
In this newsletter we look at what explains this sudden optimism for an economy that was seeing a major slowdown in growth even before the Covid-19 pandemic hit and why the “sweet/bright spot” terminology has been embraced by many.