The Phillips curve, a long followed but debated correlation between inflation and unemployment, has come back into focus in post-pandemic months.
In answering these questions, the paper notes that the output gap in India is still negative but is closing fast.
It adds that while the Phillips curve in India "is alive", it's recovering from a period of flattening that has lasted more than six years since 2014. This, the central bank attributed to the introduction of inflation targeting in India, which helped anchor inflation expectations. Inflation expectations can feed into actual wage and price increases and lead to inflation.
The analysis, however, also found that as the output gap becomes positive, inflation tends to rise faster. The paper goes on to show that the output gap in India is still negative but is closing quickly.
"Under current macroeconomic conditions, still weak demand conditions are flattening the Phillips curve in India, providing some manoeuvring room for monetary policy to support the recovery without being hemmed in by demand-driven inflation concerns," the paper concludes.
There is need for vigilance, however, as the (Phillips) curve steepens with the output gap closing and moving into positive territory, causing upside risks on the inflation front to rise.RBI Paper
The paper, which is a view from the RBI's research department, comes ahead of a policy review where the central bank is expected to take stronger steps to unwind monetary policy accommodation. This, however, is likely to come via an increase in the reverse repo rate rather than the benchmark repo rate.
The MPC, which votes on the repo rate, is likely to leave it unchanged as headline inflation remains within the comfort band of 4 (+/-2)%, even though price pressures are now starting to rise.
Retail inflation, the nominal anchor for monetary policy in India, was at 4.5% in October. However, core inflation rose to over 6%. Wholesale inflation data, too, is signaling a build-up of price pressures.
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