Volatile food prices led to India cenbank missing inflation forecasts

  • India’s central bank has been consistently missing its inflation projections over the last two and half years mainly due to extreme weather conditions that drove up food prices, economists said on 13 Oct 22.
  • Inflation has been above the RBI’s quarterly projections in the bi-annual monetary policy report (MPR) in eight out of the last 10 quarters until Sep 22, while retail price rise exceeded the 4%-6% mandated target band since Jan 22.
  • RBI’s inflation projections in the MPR are based on its economic model but the extreme weather conditions have made food price volatility hard to predict, said economists.
  • “Particularly in India, monsoon has a role to play. If rice producing states don’t receive up to the mark rainfall, it can cause inflation to grow…and those are hard things to predict,” said Disha Sahgal, an economist and country risk manager with ANZ.
  • However, the RBI’s monetary policy committee does take into account near-term price pressures when it announces its quarterly projections, and the revised projections by the MPC have been closer to actual numbers due to constant revisions.
  • “War-induced price pressures as well as domestic supply shocks turned out to be stronger and more persistent than anticipated, resulting in actual inflation exceeding projections by around 100 bps each in 1Q23 and 2Q23,” the RBI said in its latest MPR published on 30 Sept. 22.
  • It added that a large part of the surprise increase came from food inflation due to global factors, while heat wave and depreciation in the INR were also responsible for the projection errors.
  • Black swan events like the COVID-19 pandemic and the Ukraine-Russia war had overall made mathematical forecasting difficult, resulting in actual inflation overshooting the prediction, economists said. The extreme volatility has raised the need for a rejig of inflation modelling.

External Link : https://www.reuters.com/world/india/volatile-food-prices-led-india-cenbank-missing-inflation-forecasts-economists-2022-10-13/