Monetary Policy Committee consistently overestimating retail inflation; October rate at 3.31 per cent

For instance, the MPC’s quarterly and half-yearly estimates so far this fiscal have overshot the actual inflation print.
Reuters file image of a retail market used for representational purpose only.
Reuters file image of a retail market used for representational purpose only.

HYDERABAD: India’s Monetary Policy Committee (MPC) recently turned two, but it appears that the assembled brains are yet to hit the bullseye on inflation projections, which happens to be their key responsibility area.

For instance, the MPC’s quarterly and half-yearly estimates so far this fiscal have overshot the actual inflation print.

The committee projected price rise during April-September, 2018 at 4.7-5.1 per cent in its first FY19 bi-monthly policy statement in April, and later revised it to 4.8-4.9 per cent in June, but in reality, it printed at 4.31 per cent—nearly 50 bps lower than the estimate.

Similarly, as per the MPC, inflation was estimated at 4.6 per cent during July-September, 2018 (later revised downwards to 4 per cent), while it actually settled at 3.85 per cent. Likewise, for the first quarter April-June, CPI stood at 4.79 per cent, as against the projection of above 5 per cent.

Last year too, the MPC systematically projected high inflation rates, leading to high real policy rates, but the margin of error was understandable considering the committee’s maiden efforts. Now, after two years, the MPC’s inability to maintain accuracy partly signifies the need for reforms in data collection. It may be recalled that in August, RBI Governor Dr Urjit Patel made a candid confession on missing the inflation target ‘for several months’ and hence hiked policy rates by 25 bps to prevent inflation from ‘drifting away’ farther than the inflation mandate of 4 per cent.

However, after two successive hikes, it kept rates unchanged last month, with Patel stressing that the MPC wasn’t bound to tweak rates every time it met.
Fresh data on Monday showed that October’s retail inflation fell to a 13-month low of 3.31 per cent as against 3.77 per cent a month ago. Consumer prices have fallen for the third straight month. Theoretically, lower prices should prompt the central bank to tweak policy rates, but analysts have no such hopes.

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