Global financial services firm Moody’s on Thursday said Indian economy is facing stagflation, where growth is slow and inflation high, and cautioned that the Reserve Bank cannot be too aggressive in cutting interest rates.

“India’s economy is in stagflation, with notably weaker growth but inflation still stubbornly high,” said Mr Glenn Levine, Senior Economist, Moody’s Analytics.

Amid wholesale price-based inflation ticking up to 7.5 per cent year-on-year in May due to supply-side factors, the agency said it will cause further “headaches” at the RBI.

“Yet with the inflation numbers now being driven by supply-side factors, and with the currency being pushed downwards... and India’s weaker growth prospects, we think that the RBI could cut rates without it putting too much upward pressure on inflation,” said Moody’s Analytics.

However, it said the Reserve Bank of India (RBI) cannot be “too aggressive” while inflation remains a problem.

The RBI is scheduled to review mid-quarter monetary policy on June 18.

Moody’s said the recent plunge in the rupee is pushing up the price, especially imported goods and commodities priced in US dollar.

It further said with the rupee now sitting 15 per cent below its peak of late-February, this will ensure that WPI inflation remains in the 7 per cent to 8 per cent range for another six months.

“Indeed, with the growth side of the economy slowing, the risks have shifted sharply towards growth and they (the RBI and other policy makers) should just grin and bear the higher inflation numbers,” it added.

Stagflation is a situation when economic growth of a country stagnates while inflation is rising.

Moody’s Analytics is a part of Moody’s Corp that provides expertise in economic and consumer credit analysis, credit research and risk measurement, among others.

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