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The economic destruction from the pandemic and the ensuing policy support from central banks of emerging market economies have been similar. But central bankers are now diverging in the way they assess their economy’s recovery and the policy path from here on.

While on the face, it may seem perfectly plausible to respond to different paces of recovery and inflation, the key factor that seems to set 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. Several of them are commodity and services exporters," the bulletin said.

Divergent path
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Divergent path

As the adjoining chart shows, nations such as Brazil, Russia, Mexico and South Africa have hiked policy rates by a big margin in 2021 so far. These nations are exporters of commodities and services. The global commodity price surge has led to rapid increases in incomes and inflation. The 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 the rapid rise in inflation rather than wait for a more sustained GDP growth. As such, favourable terms of trade and exports have begun to power these economies. In contrast, nations that enjoy low inflation despite economic expansion have been able to keep policy accommodative.

So, where does India fit? RBI has said that it is difficult to compartmentalize the country within these categories. But a net commodity importer with a lower proportion of the population vaccinated, India can’t afford to give up on its accommodative policies despite recent signs of inflation flare-up. This is the message from RBI’s report. The signs of inflation flare-ups are mostly still supply-side triggers, it believes. “India has chosen not to join the EME bandwagon of rate-hikers that is gathering numbers and instead, to maintain an accommodative stance as long as necessary to revive and sustain growth, with the limited space provided by inflation remaining within the tolerance band, despite being elevated, and not outside it," the report said.

To be sure, the share of vaccinated population has also shaped policy response. Countries that have a larger share of population inoculated have been able to tighten policy faster. India’s vaccination pace has hastened, but the population coverage is yet to provide comfort

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