Empirical analysis suggests that the global food and energy shocks experienced during H2 FY22 could ceteris paribus (with other conditions remaining the same) impart upward pressure of around 2.5 percentage points on domestic inflation over time through the cost-push channel, according to RBI’s monetary policy report (MPR).

The report noted that the current bout of global inflation is mainly driven by the jump in global energy and agricultural product prices, which rose by almost 40 per cent and 10 per cent, respectively, during H2 FY22.

The empirical analysis indicates that a global inflation shock of one percentage point—modelled as a simultaneous one per cent increase in prices across all the countries and sectors—could increase inflation in India by around 63 basis points (bps) through second round effects comprising domestic indirect effects (46 bps) and global spillovers (17 bps)9, in addition to the direct impact of 100 bps.

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Domestic sources of inflation (direct as well as indirect) mainly stem from agriculture and allied activities, housing, textiles, and pharmaceutical sectors.

Global spillovers, representing the imported inflation channel, are driven by price pressures in energy, mining, chemicals, trade, basic metals and machinery.

In terms of source countries, the most important contributors to inflation in India are oil exporting countries, China and the US.

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