RBI keeping track of inflationary forecasts

RBI keeping track of inflationary forecasts
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First Published: Fri, Mar 23 2007. 12 16 AM IST
Updated: Fri, Mar 23 2007. 12 16 AM IST
You could be a housewife harried by the price of vegetables, a building contractor ruffled by the steep rise in cement prices or a small entrepreneur struggling with a mounting wage-bill—there is no doubt that the rise in inflation is beginning to bite into your budget.
In a quest to gauge what economists call inflationary expectations, the Reserve Bank of India (RBI) is now keeping tabs on how ordinary people like you expect prices to move in the months ahead. In its first such attempt, RBI has started asking ordinary citizens in urban India for their views on the direction of inflation.
For the past year, the central bank had been surveying a sample of more than 5,000 households, businesses, professionals and employees in the metros and mini-metros to gauge their “inflationary expectations”. The respondents to this quarterly survey were asked just one question: their estimate of inflation in the next three months.
RBI insiders say the survey had been a good predictor of future inflation.
Economists see this as a positive development. “Central banks try to send signals to curb inflationary expectations, and in that sense such a survey could help RBI in its task,” says A.M. Pethe, professor of economics at Mumbai University. “But a lot depends on how this survey is being conducted. Companies and investors in the West tend to be more sophisticated, since they depend on professional economic advice for their decisions.”
Besides historical rates of inflation tracked by official statistical agencies, central banks world over also keep a keen eye on expectations of future inflation, because the basic economic decisions to spend, save and invest depend on expectations of future inflation rather than on past inflation. Data on inflationary expectations are key inputs in many of the number-crunching models that central banks use to feel the pulse of an economy.
“In India, the government tends to use statistical jugglery to keep measured inflation down. Inflation can be suppressed, but not inflationary expectations,” says a bank economist, who did not wish to be identified.
The problem is that there has been no scientific attempt to estimate inflationary expectations in India till RBI started its survey. At a speech he gave to senior RBI officials on 16 March 2007, Axel Weber, president of the German Bundesbank, and a member of the governing council of the European Central Bank, said there are three ways in which central banks in developed markets keep tabs on expectations of future inflation.
First, they survey professional forecasters who use complex econometric models to estimate inflation. Second, they keep a close watch on the market prices of heavily traded inflation-indexed bonds. Third, they use consumer surveys of the type RBI is now using.
In India, the lack of a large-enough community of professional forecasters and the absence of trading in inflation-indexed bonds limits RBI’s options, as far as watching inflationary expectations goes.
The inflation-survey that RBI has started will help the central bank overcome this information gap.
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First Published: Fri, Mar 23 2007. 12 16 AM IST