RBI’s June policy: When numbers offer less clarity than words
Markets love predictable central banks; ones that stick to their forecasts. RBI did neither in its June policy
Consider the first number in the Reserve Bank of India’s (RBI’s) monetary policy, the 25 basis points hike in the policy rates. It hardly matters for the markets because bond yields have already risen over 20 basis points since the last policy and loan rates have been hiked by banks.
What the hike shows is the central bank has caught up with the markets. Its six-member monetary policy committee (MPC) is finally convinced that the sharp rise in global crude oil prices and in domestic core inflation requires policy tightening.
Now, let us take the second metric in the policy, which is the inflation forecast. The central bank raised its forecast of average inflation for the second half of fiscal year 2019 by 30 basis points to 4.7%, because its assumptions on global crude oil prices were too conservative. Taking the sharp rise in oil prices since April, the inflation forecast revision looks reasonable.
But the revision in inflation forecast is the second one within just four months. In the previous policy statement, RBI had lowered its inflation forecast. That doesn’t inspire confidence in the markets, as a central bank is supposed to be the thread of consistency and stability. Forecasts cannot be reactionary although policy decisions tend to be. This latest revision makes RBI’s forecasting exercise look unsophisticated.
What makes it worse is that the forecasts do not reflect the expected hike in minimum support prices (MSP). The least RBI could do is assume a conservative estimate for MSP, and give a forecast that imparts clarity to the market.
What is the difference between central bankers and market economists if not for the efficacy of their forecasts?
The language accompanying the forecasts is much better to understand than the numbers themselves. The MPC statement has stuck to the upside risks it had flagged off in February with respect to MSP hikes promised by the government, the rise in core inflation and volatile global crude oil prices. To that extent, the central bank has given a clear indication on the path of policy rates.
Bond markets have already priced in two hikes and analysts now expect another increase.
But the timing is anybody’s guess. RBI has held on to its neutral stance, to retain the flexibility to respond either through accommodation or tightening.
Markets love predictable central banks; ones that stick to their forecasts. RBI did neither on Wednesday. The only way it escaped the wrath of the markets was to keep them guessing, again.