Recent upsurge in inflation due to the black swan event offers a classic example of the globalised nature of current inflation
The benefits of globalisation come with certain risks and challenges, Reserve Bank of India governor, Shaktikanta Das on Saturday while speaking at the inaugural Kautilya Economic Conclave. He was elaborating how the global inflation scenario affecting our domestic inflation dynamics was evident during the pandemic. Shocks to prices of food, energy, commodities and critical inputs are transmitted across the world through complex supply chains. These global factors present difficult policy trade-offs between price stability and stabilising economic activity, especially when the economy is recuperating from repeated shocks. The recent upsurge in inflation due to the black swan event, i.e., the war in Europe, on top of another such event, i.e., the Covid-19 pandemic offers a classic example of the globalised nature of current inflation, the governor said. They add to the macroeconomic and financial stability challenges from volatile capital flows in a financially globalised world.
The recent developments call for greater recognition of global factors in domestic inflation dynamics and macroeconomic developments which underscore the need for enhanced policy coordination and dialogue among countries to achieve better outcomes. While global factors have always been an important driver of domestic inflation, what is witnessed over the past three years is the more protracted and sizeable role of global factors in proportions not witnessed in decades. These factors have an even more conspicuous effect on net commodity importing countries like India.
'Price stability is key to maintaining macroeconomic and financial stability', the governor said. In a broader sense, inflation is a measure of the trust and confidence that the public repose in the economic institutions of a country. While factors beyond our control may affect inflation in the short run, its trajectory over the medium-term is determined by monetary policy. Therefore, monetary policy must take timely actions to anchor inflation and inflation expectations so as to place the economy on a strong and sustainable growth pedestal. The RBI will continue to calibrate policies with the overarching goal of preserving and fostering macroeconomic stability. In this endeavour, RBI will remain flexible in its approach while being cogent and transparent in our communication. If history is any guide, i am optimistic that our actions will usher in a new era of prosperity in the years ahead, Das stated.
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