Central Idea

The Reserve Bank of India (RBI) officials have reported a decreased risk of stagflation in India, now estimated at 1%, down from 3% in August

What is Stagflation?

	Details
Definition	An economic condition characterized by stagnant growth, high unemployment, and high inflation.
Indian context	Fluctuating growth rates; periods of slowdown have raised concerns about stagnation.
Inflation Dynamics in India	Historically high at times, often driven by rising food and fuel prices.
Supply Shocks	Vulnerable to global oil price fluctuations and agricultural supply shocks (e.g., monsoon variability).
Past Episodes	Elevated stagflation risks were noted during the Asian Crisis, Global Financial Crisis, taper tantrum, and COVID-19 pandemic.

Two-Pronged Approach: RBI assessment utilized two methods: analyzing periods of low economic growth with high inflation, and employing ‘at-risk’ frameworks, namely “Inflation at Risk” (IaR) and “Growth at Risk” (GaR), using quantile regression.
Determinants of Stagflation: Key factors identified include supply-side shocks, commodity price spikes, tighter financial conditions, and currency depreciation.

Financial Conditions and Rupee Depreciation: Financial conditions and the depreciation of the rupee against the U.S. dollar are significant risk factors for stagflation in India.
Empirical Evidence: The integrated IaR and GaR frameworks corroborate these findings, although the impact of crude oil prices on domestic fuel prices has limited predictive power for stagflation.
Global Concerns: Post-pandemic, higher commodity prices and the U.S. dollar’s appreciation raised global stagflation concerns.

	Explanation
Depression	A sustained, long-term downturn in economic activity. Characterized by significant decline in GDP, high unemployment, low spending, and reduced industrial output.
Deflation	A general fall in the price level of goods and services over some time, indicating negative inflation rates.
Disinflation	A decrease in the rate of inflation, i.e., a slowdown in the rate at which prices increase. Example: Inflation rate falling from 8% to 6%.
Reflation	Economic measures, such as increasing money supply or reducing taxes, aimed at stimulating the economy to reach its long-term growth trend after a downturn.
Skewflation	A situation where the price of some items rises significantly while others remain stable. Example: Seasonal rise in the price of onions while other prices are stable.