Why in news?

  • There was an astronomical rise of CPI to 7.35% in December 2018.
  • This has opened doors for Indian economy to enter a phase of stagflation.

What is stagflation?

  • Stagflation is a condition of slow economic growth and relatively high unemployment, or economic stagnation, accompanied by rising prices, or inflation.
  • It can also be defined as inflation and a decline in gross domestic product (GDP).

Why did this happen?

  • Onion was the prime villain pushing up price inflation in vegetables to a huge 60.50% compared to December 2018, prices of other food items such as meat and fish (up 9.57%), milk (up 4.22%), eggs (up 8.79%) and some pulses were also on the upswing.
  • These are a largely seasonal rise in prices and are driven mainly by supply­ side factors and the prices will reverse once the supply shortfall is addressed.

What is the role of RBI in this situation?

  • The sharp jump in the CPI has queered the pitch for the Reserve Bank of India’s monetary policy review in February.
  • The central bank stood pat on rates in the December policy precisely due to fears of inflation and had even revised upwards its inflation projection for the second half of the fiscal to 4.7­5%
  • Central bank to cut rates at least one more time to stimulate growth. It would be interesting to watch the deliberations of the MPC.
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