More reliable estimate of non-inflationary rate of growth sought
The Reserve Bank of India is looking at alternative methodologies for a better assessment of inflation and inflation expectations that are the cornerstones of monetary policy formulation for the economy, RBI Deputy Governor Subir Gokarn said on Monday.
Delivering the fifth SAGE-MSE (Madras School of Economics) Endowment lecture on ‘India's non-inflationary rate of growth (NIRG): Analytical Perspectives and Policy Implications', Mr. Gokarn advocated a more reliable estimate of NIRG to minimise the risk of policy errors and to ensure that the policy direction was consistent with the state of the economy.
While the NIRG was a critical anchor for monetary policy, what made decision-making challenging was its variability pressured by short-term and long-term triggers. Also, while there was a correlation between growth acceleration and inflation, it is the threshold beyond which the processes kicked in that seemed to have changed, he said.
Mr. Gokarn pointed to the contrasting scenarios in a time series analysis where for one period inflation expectation levels were roughly the average of food price inflation and overall WPI, while for a more recent period inflation expectations remained rigid in spite of food inflation steadily declining over the last five quarters registered a steady decline from about 20 per cent to less than 10 per cent along with the WPI coming down from less than 10 per cent to about 7.5 per cent.
According to the RBI official, as important as it was for any rule-based approach to monetary policy had to have a good estimate of NIRG, the persistence of inflation should induce a re-examination of NIRG from the narrow perspective of monetary policy and not broad structural policy, he said. He advocated setting a growth rate range of 7-9 per cent to accommodate both camps of the debate — one that argued that the monetary policy was too tight and the other that contended that it was too loose.
While many countries do surveys to complement other sources of inflation expectation estimates — business surveys and tracking of the financial market — India does not have comparable interventions in a meaningful sense, which creates a zone of uncertainty in policy formulation, he said.
While lack of data could not stand in the way of policy-making, the RBI has been addressing the fuzziness on analytics by complementing the modelling and forecasting exercises through surveys.
The RBI commissioned these household surveys in the middle of each calendar quarter where consumers in about 5,000 homes were quizzed to gather their thoughts on the rate of inflation for the next few months or for the course of a year. The RBI was also developing an aggregate Consumer Price Index based on the full basket of consumption as an inflation forecasting tool that would better the Wholesale Price Index, he said.
D. K. Srivastava, MSE Director and Vivek Mehra, CEO and MD, SAGE Publications also participated.