MUMBAI: The Reserve Bank of India’s (RBI) inflation forecasting model is coming under increasing scrutiny from economists after the central bank consistently overestimated price pressures this year, contributing to a hawkish policy approach.
The central bank’s inflation miss in the first three months of the year was 0.7 percentage points – the biggest gap in almost six years, and well above economists’ projections.
Estimates in the subsequent two quarters have also been off the mark, by smaller margins of 0.2 points and 0.1 points, respectively.
Economists predicted another big miss in the current quarter after a surprisingly low inflation print in October.
That means the RBI’s projection of 2.6% for the fiscal year through March, published as recently as in October, is already looking out of date.
UBS Group AG economist Tanvee Gupta Jain sees inflation ranging between 2% and 2.2% in the period, a historical low.
The upshot is that the RBI has probably been more hawkish than necessary, economists said, and reluctant to cut interest rates even though the economy likely needed a boost after US President Donald Trump slapped 50% tariffs on Indian goods.
In June, governor Sanjay Malhotra delivered a bigger-than-expected interest rate cut of 50 basis points, but shifted the policy stance to neutral, a relatively hawkish move signalling narrower scope to ease rates further.
The RBI has kept rates unchanged since then, despite the slowdown in inflation.
Sonal Varma, an economist at Nomura Holdings Ltd, said central banks tend to be conservative in their forecasts and forecasts often “embed policy intentions” rather than pure predictions.
The risk, though, is when inflation consistently comes in below forecasts, inflation-adjusted interest rates “end up being much higher than intended, and monetary policy becomes unintentionally restrictive,” she said. “Repeated misses can also hurt policy credibility.”
The main reason the RBI and economists have gotten inflation forecasts so wrong this year is because of the sharp drop in food prices. Harvests have been strong after a favourable monsoon season, while improvements in supply chain management have helped lower costs. — Bloomberg
