Monetary Policy Committee inflation estimates miss the mark for 6 quarters

In September 2016, when the Reserve Bank of India (RBI) adopted inflation targeting as its core mandate, it was expected to reduce uncertainty surrounding price rise.
Image used for representational purpose only.
Image used for representational purpose only.

HYDERABAD : In September 2016, when the Reserve Bank of India (RBI) adopted inflation targeting as its core mandate, it was expected to reduce uncertainty surrounding price rise. But even after two years, India’s Monetary Policy Committee (MPC) seems to be far from achieving its mandate. An Express analysis shows that the six-member committee’s projections missed the actual inflation print in all the past six quarters. 

Usually, MPC gives an annual guidance on inflation and GDP growth twice a year — in April and October — and though there’s enough room to revise December and March quarter estimates closer to reality, the committee’s projections are often falling short of their final prints. For instance, in 2016-17 financial year, retail inflation ended at 4.5 per cent, 50 basis points below the projected 5 per cent, while it stood at 3.6 per cent in 2017-18 financial year, significantly undershooting the 4.5-5 per cent estimate.

Accurate projection of inflation estimates is the cornerstone of monetary policy making as rates are dependent largely on which way the inflation needle moves. Given that MPC’s estimates were off the cuff, analysts are raising concerns as the pain inflicted by high policy rates than what the market needs, essentially knocks down potential economic growth.

Even in its last policy review in October, RBI Governor Urjit Patel differed from the dominant view, insisting that “rate cuts were off the table”. Considering foreign capital outflows, rising crude prices and weakening rupee, the MPC changed its stance from neutral to calibrated tightening.

Disappointing Patel and team, crude prices fell nearly 26 per cent since the October review, and rupee too is behaving well, making the MPC’s task difficult. No one expects RBI to hike rates on Wednesday, but some hope that the committee may revert to the neutral zone, which allows it to hike or cut rates with ease. That said, three upside risks continue to bother policy makers — crude prices, exchange rate volatility and government’s fiscal deficit math. Besides, it also has to manage liquidity, which the Reserve Bank kept too tight fearing inflation, and the impact of revised minimum support prices.

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