However, while this combination of domestic and global supply responses has helped to steadily bring the inflation rate down, the Indian economy has always been vulnerable to inflation shocks, which have caused uncomfortable spurts in prices across the board. Slide 9 identifies some major shocks to the system, all of which required strong policy responses.
As is evident from the graph, the vulnerability of the Indian economy to supply shocks on the food and energy fronts is persistent. There have also been periods in which a significant fiscal expansion accompanied by an accommodating monetary stance – i.e., demand-side pressures – raised the inflation rate significantly.