Impact of RBI’s Balance Sheet on Inflation

Sitikantha Pattanaik, Binod B. Bhoi and Harendra Kumar Behera in this RBI article analyse whether the growth in RBI balance sheet during the pandemic led to inflation today:

The global surge in inflation since the second half of 2021 has reignited interest in assessing the role of post-pandemic balance sheet policies of central banks in fuelling inflation, against the backdrop of the missing inflation puzzle that was encountered after the global financial crisis (GFC). This article explains the link between RBI’s balance sheet size, growth in monetary aggregates and inflation, and explores conditions under which excess money growth may not be inflationary. It finds that in the post-COVID period, the decline in income velocity of money and persistent negative output-gap warranted a larger than usual growth in monetary aggregates, without endangering the inflation outlook.