Arvind Subramanian, Chief Economic Adviser. (Source: Twitter/@NitiCentral)

RBI Made Large Inflation Forecast Errors, Arvind Subramanian Says

The finance ministry on Wednesday criticised the Reserve Bank of India (RBI) for “overstating inflation” and making “large forecast errors”, after the central bank kept key rates unchanged even as growth slows and inflation remains low.

Headline inflation is well below target, and core inflation has also declined sharply, Chief Economic Adviser Arvind Subramanian told reporters in New Delhi.

There is a plausible alternative macroeconomic assessment... In this view, inflation forecast errors by the RBI have been large and systematically one-sided in overstating inflation.
Arvind Subramanian, Chief Economic Adviser

The central bank kept its key repo rate unchanged at 6.25 percent in its second bimonthly monetary policy review for the current financial year. The monetary policy committee (MPC), in its statement, noted the recent fall in inflation but added that it remains focused on the commitment to keeping headline inflation close to 4 percent on a durable basis.

“Premature action at this stage risks disruptive policy reversals later and the loss of credibility. Accordingly, the MPC decided to keep the policy rate unchanged with a neutral stance and remain watchful of incoming data,” the MPC statement said.

Subramanian said that the the cental bank’s inflation outlook has also been “rendered benign by an appreciating nominal exchange rate, a good monsoon and capping of oil prices.”

Growth has decelerated from last July as suggested by indicators like real gross value added, the index of industrial production, credit to industry, capital formation and capacity utilisation, he added.

The outlook for growth is unlikely to warrant any serious concern about closing output gaps – and hence stoking inflation structurally – because of the twin balance sheet problem which is keep investment week, ongoing fiscal consolidation, and the appreciating real exchange rate. Even personal loan growth that proxies for consumption has recently been decelerating. 
Arvind Subramanian, Chief Economic Adviser

The real policy rates are tight and rising at a time of low inflation and slow growth, he said , adding that appreciating real exchange rate makes real monetary policy conditions even tighter.

“In the recent times, seldom have economic conditions and the outlook warranted substantial monetary policy easing,” the chief economic adviser said.

Answering a question on monetary policy members declining to meet finance ministry officials before the policy review, Subramanian said more of such discussions will help the government in giving more inputs to the rate setting panel.

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