Monetary policy faces severe information constraints: RBI DG Patra

The moment inflation is released by NSO, it gets hit by unanticipated shocks, says RBI Deputy Governor Michael Patra

The conduct of monetary policy in India faces hurdles stemming from information constraints and the manner in which data is covered in the country, Reserve Bank of India (RBI) Deputy Governor Michael Patra said on Thursday.

“A vast literature exists that seeks to explain the end-product... that is the monetary policy decision. I’m going to take a step back and explore the manner in which committee members think and deliberate in order to come to that judgement,” Patra said at the State Bank of India Banking and Economic Conclave.

“There are severe information constraints that the monetary policy faces — data coverage, frequent revisions, lags, etc, so the driver can never determine the speed of the car,” he said.

Patra who is the Deputy Governor in charge of monetary policy, said a policymaker must decide on the basis of “vintage” data where relevant goal variables of the committee would be in the future. The policymaker has to then “shoot blind” at an angle that ensures that the target is met, Patra said.

The senior central banker flagged the risk of inflation data being prone to unforeseen shocks, which could sometimes influence the data as soon as its release.

“The moment inflation is released by the National Statistics Office (NSO), it gets hit by unanticipated shocks — Ukraine, food, energy prices rising, etc. So, the moment it leaves the Statistics Office, it’s prone to shocks and to change,” he said.

“Furthermore, these goal variables are not actually static. They are moving over time and that path is unknown because they can be thrown off course by those shocks,” he said.

Patra’s comments come at a time when the RBI’s Monetary Policy Committee has for the first time failed to achieve its mandate of keeping inflation within a 2-6 per cent tolerance band prescribed by the government for the rate-setting panel. The official mandate says the MPC must ensure that inflation does not stay outside of that band for more than three successive quarters.

Latest data showed that Consumer Price Index- (CPI-) based inflation was at 6.77 per cent in October, down from 7.41 per cent a month ago. Inflation has been above the MPC’s 4 per cent target for 37 consecutive months.

During the initial phase of the Covid-19 pandemic in 2020, India’s inflation climbed as restrictions on movement led to severe supply-side disruptions. From May to December 2020, the MPC was precariously close to failing on its mandate as CPI inflation soared above the upper tolerance band. The RBI, however, had treated April and May 2020 as breaks in the CPI series due to difficulties in gathering data amid nationwide lockdowns.

Patra on Thursday, also flagged challenges in policymaking that stem from revisions in official data on metrics, such as inflation and growth.