In the second quarter of 2021, India’s gross domestic product (GDP) growth was boosted by a rapid comeback in economic activity but rising inflation could derail the recovery.
Despite the pandemic, the Indian government, and the Reserve Bank of India (RBI) have been touting their achievement of keeping inflation under control. They argue that this is preferable to how an opposition party handled inflation during the 2008 financial crisis or during the 2013 taper tantrum. That, unlike in 2013, when it was one of the “fragile five,” India is expected to be the fastest growing big economy this time around.
The RBI needs to tighten its stance and boost policy rates to manage inflation, retain foreign investments, stop the rupee’s devaluation, and defend India’s BOP position. However, this will have an impact on growth.