‘Data volatility may lead to policy miscalculations'

The Reserve Bank of India on Tuesday expressed concern over the sharply varying macroeconomic data, including those on growth and inflation, which it said on some instances led to off-the-mark estimates on the economy.

“In the Reserve Bank, we are handicapped by the reliability of some of the basic data that we need to use in policy calculations. In particular, the data we get on unemployment and wages do not inspire confidence as regards quality...making us second-guess how the provisional numbers may be revised upwards,” Governor Duvvuri Subbarao said here.

“Sharp volatility in IIP data is a problem. We need to understand what is leading to data volatility as it may lead to policy miscalculations,” the Governor told the 5th RBI Statistics Day celebrations at the RBI headquarters here.

“Each time when we have to make an assessment of inflation situation, we are left to double-guess how the provisional numbers may be revised upwards,” he said.

“When we were making the policy, the IIP numbers available to us in February 2010 was 6.8 per cent, whereas the economy was actually growing much faster. The provisional numbers, which are off-the-mark by a significant margin, can mislead policy calculation,” he warned.

The Governor admitted that such revisions were also factors behind the RBI making inflation projections that proved to be below the actual number in the last fiscal year.

The RBI had initially forecast an annual inflation at 5.5 per cent by March, 2011, but subsequently was forced to revise it upwards to a high 7 per cent and then to 8 per cent.

And finally when the year ended, it was at a much elevated level of 8.98 per cent, which was ironically revised further upwards to 9.68 percent in June.

Similarly, the March IIP numbers were also revised upwards to 7.8 per cent in June from the initial reading of 7.3 per cent released in May, while a sharper revision was seen for the December IIP, which was upwardly revised to 2.5 per cent from the provisional reading of a poor 1.6 per cent.

On the impact of the regular trend of sharp data revisions, the Governor said, the RBI's policy formulation was also handicapped by frequent revisions to data. “We make policies in real time and if the provisional data are inaccurate, the resultant policies can turn out to be sub-optimal choices,” he said.


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