The economic destruction from the pandemic and the ensuing policy support from central banks of emerging market economies have remained the same. But central bankers are now parting ways in assessing the recovery of their economy and the policy trajectory from here.
While on the face, responding to different phases of recovery and inflation may seem entirely plausible, the key factor that sets them on different paths is the structural differences in these economies. This is a point highlighted by the Reserve Bank of India (RBI) in its monthly bulletin released on Thursday.
“Countries that have tightened monetary policy are also growing rapidly. Many of them are commodity and service exporters,” the bulletin said.
see full image
As the attached chart shows, countries such as Brazil, Russia, Mexico and South Africa have so far hiked policy rates by a large margin in 2021. These nations are exporters of goods and services. The boom in global commodity prices has led to a sharp rise in income and inflation. Gross domestic product (GDP) in some of these economies has already returned to pre-pandemic levels. Ergo, their central banks have chosen to deal with a rapid rise in inflation rather than wait for more sustained GDP growth. As such, favorable terms of trade and exports have started giving strength to these economies. Conversely, nations that enjoy low inflation despite economic expansion have been able to keep policy liberal.
So, where does India fit in? RBI has said that it is difficult to divide the country into these categories. But a net commodity importer, with a small proportion of its population immunized, India cannot afford to abandon its liberal policies despite recent signs of inflation. This is the message of the RBI report. It believes bullish signs of inflation are still a supply-side trigger. “India has chosen not to join the EME bandwagon of rate-hikers that is collecting numbers and instead, to revive and sustain growth, as long as inflation is contained, with limited space remaining within the tolerance band. Chose to maintain an accommodative stance until necessary, being elevated, and not outside it,” the report said.
To be sure, the share of the vaccinated population has also shaped the policy response. Countries where a large proportion of the population has been vaccinated have been able to strengthen policy rapidly. Vaccination has picked up pace in India, but population coverage is yet to provide comfort
Don’t miss a story! Stay connected and informed with Mint.
download
Our App Now!!
.