HYDERABAD: The RBI’s monetary policy framework is in its salad days, and wants to get a first-hand picture of food prices. So last year, it embarked on “grassroots work, relying on regional staff and local mandis”, perhaps a first in its history, instead of living at the mercy of CSO estimates, which come once in 12 months.Food accounts for 46 per cent of the retail inflation basket and getting it right is job half-done.
The two-year-old Monetary Policy Committee (MPC) is often criticised for missing inflation estimates, which Deputy Governor Viral Acharya said was “cherry-picking data to say it (RBI’s inflation modelling) isn’t working”.
The truth is, MPC has been repeatedly revising its own estimates downwards, while actual monthly inflation is printing way off the mark. In fact, on Thursday, it once again revised retail inflation estimates down to 2.8 per cent for Q4FY19.
Admitting that RBI takes such criticism seriously and introspects, Acharya said, “Headline inflation last year averaged almost exactly at 4 per cent, so while you may have issues with specific level of projections, there have been errors on the other side.”
Starting 2018, Acharya said, RBI started specific sub-groups of modelling teams to focus on individual food items from regional offices and mandi arrivals, to get a sense of what the CSO number might look like. He, however, reasoned that the relative errors RBI makes (in food inflation) wasn’t quite out of line like other economies, where food is a bigger component.
Markets will certainly be grateful for Acharya’s candour with regards to food prices, but it’s the non-food items or core inflation that is living in a parallel universe. Comprising household goods, health, transport and communication services, core basket accounts for 28 per cent of retail inflation and has been erratic to say the least in 2018, hovering between 5 and 6 per cent. Last December, it stood at 6.45 per cent, way above the MPC’s 4 per cent target. This, coupled with volatile fuel prices, the fear-mongering about price rise appears real, though headline inflation at around 2 per cent for five consecutive months belies realities of price fall.
Experts say rising core inflation isn’t driven by demand, but partly due to low base and rising input prices, and that nothing stops it from doing a repeat in 2019, which is to say, core inflation could be sticky and pinch pockets even if retail inflation remains gentle.
Lastly, accurate inflation estimates help policymakers deliver the right dose of rates to either goose the economy or prevent it from heating up, but in the absence of appropriate core prices, the real benefit may remain unrealised.
The two-year-old MPC is often criticised for missing inflation estimates. The truth is, MPC has been repeatedly revising its own estimates downwards, while actual monthly inflation is printing way off the mark. On Thursday, it again revised retail inflation estimates down to 2.8% for Q4FY19.