Mumbai: How does India’s central bank set interest rates in the absence of April inflation data?
That’s the question many are asking after the statistics office failed to publish a complete set of data for consumer and wholesale prices this week, saying it wasn’t able to conduct all the necessary fieldwork for its surveys amid a nationwide lockdown to contain the coronavirus outbreak. The consumer price report on May 12 provided details for food prices but not headline inflation.
Economists say policy makers will now rely on alternative surveys and in-house forecasting models to make sense of price trends and decide on interest rates. The Reserve Bank of India’s six-member Monetary Policy Committee, led by Governor Shaktikanta Das, is scheduled to make its next rate decision in early June.
“Data on food prices is available and core inflation is amenable to modeling,” said A. Prasanna, chief economist at ICICI Primary Dealership Ltd. Mumbai. “In terms of forecasting one-year ahead inflation, they should still be able to arrive at their decisions. However, confidence bands around these forecasts could be unusually wide.”
Bloomberg Economics’ Abhishek Gupta used the reported data this week, along with an assumption of no monthly change in non-reported categories, to estimate the headline inflation rate at 5.9% in April. That’s slightly higher than the revised 5.8% reported in March and reflects a pick up in food-price growth, which accelerated to 8.6% in April. Food comprises the bulk of the consumer price basket.
A survey by the Indian Institute of Management in Ahmedabad, an institution at which MPC member Ravindra Dholakia is a professor, showed a sharp jump in one-year ahead business inflation expectations in March to 4.57% from 3.85% in February. That was the highest ever print since the inception of the survey in May 2017. The cost perceptions data also showed clear signs of price pressures building up.
Despite signals of a pickup in inflation, the central bank’s upcoming policy decision may be focused more on the worsening growth outlook, millions of job losses and falling incomes. Prime Minister Narendra Modi this week announced a $265 billion package to support the economy, including providing loans to small businesses and farmers.
“Factors other than CPI and WPI will take precedence,” said Teresa John, an economist at Nirmal Bang Equities Pvt. Policy makers will likely take a forward-looking view for now and “if the inflation trajectory does not pan out as per their expectation, then they will turn more cautious in the months ahead.” –Bloomberg
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