The term ‘soft landing’ is derived from the aviation industry where it is applied to the landings of an aircraft, hot-air balloon, gliders, or even spacecraft. This term was widely used during the tenure of former chair of the Federal Reserve, Alan Greenspan. The Federal Reserve is said to have achieved soft landings in 1965, 1984, 1994, and in 2020 due to the COVID-19 pandemic. The RBI, in 2013, had also announced rate reduction to boost consumption to help recover Indian economy.
According to Igor Greenwald, soft landing is a goal of a central bank when it seeks to raise the interest rates just enough to stop an economy from experiencing high inflation, without leading to recession. According to Annapoorna, a soft landing is a cyclical downturn in order to prevent recession. It is a gradual and relatively harmless slowdown to an industry or an economy. It is cooling down the economy after a period of rapid expansion which happens smoothly. A smooth landing ensures that the economy is not into recessions and that the contraction of the economy is low as opposed to the outcome of a massive increase in unemployment, or hard landing. The term ‘soft landing’ is also applied to an industry sector or market segment which slows down but does not crash. At the some time, the economy as a whole remains unaffected.
Unlike soft landing, a hard landing is regarded as the tightening of economic policies, leading to a sudden and sharp check of the growth. It can be seen when there is a monetary-policy intervention to control inflation which often leads to a period of stagnation or even recession.
Soft Landing in India
In India, retail inflation is at a high level. According to the RBI governor, the country had reached a soft landing until the war broke out in Ukraine in February 2022. The war resulted in the rise of crude oil prices, commodities, capital outflows, and currency depreciation and all this impacted the economy. The country also faced spillover effects of the monetary policy tightening by other countries’ central banks. The governor ensured that the economy will have a soft landing where they would bring inflation to 4 per cent with a manageable impact on growth. India has followed a flexible inflation targeting framework (not only to fix inflation but also to stabilise interest rates, exchange rates, output, employment, etc.) since 2016, and has worked well. However, the process of coming out of the current situation would take a little longer as there have been effects of external events which are beyond the control of the central bank.
Impact of Controlling Inflation
Curbing inflation always has a cost associated with it. So, controlling inflation could result in higher unemployment, lower output, lower growth, etc. The governor of RBI has confirmed that the decisions regarding liquidity and inflation will be taken as per their impact on growth and revival of economic activity. However, the focus is mainly on inflation and growth.
Soft landing may also have a positive effect on markets. For example, when the Federal Reserve applied the soft landing in 1994, inflation was between 2.5 per cent and 3 per cent. Therefore, the US stock markets did relatively well.
Conclusion
The global economy is heading towards inflation and a possible recession. With a strong financial system, well-capitalised economy, improved balance sheets, banks profitability, external sector doing good, and good asset quality indicators, a country can withstand the trade shocks, portfolio outflows, and can also avoid recession by soft landing which is easy to understand in theory but difficult to engineer in reality. When central banks use contractionary monetary policy to absorb inflation in the economy; when the policies are too contractionary and curb economic activity, it results in recession. When the economy does not contract, a soft landing is achieved. Therefore, the RBI has to handle monetary policy in such a way that the economic activity is not contracted.
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