The Reserve Bank of India (RBI) has come under a lot of fire in recent months for its interest rate decisions. Critics went to town claiming it was seeing imaginary inflation pressures in the economy. These attacks turned severe when the consumer price data for June was released. The sharp acceleration in inflation since then shows the critics were wrong.
The other noteworthy trend is that retail inflation has converged with wholesale price inflation. Policymakers were under pressure to take the transitory deflation in wholesale prices into account when setting interest rates, even though the government has clearly said that consumer price inflation should be the sole nominal anchor of monetary policy. That demand has also thankfully lost its bite.
There’s no doubt RBI needs to sharpen its inflation forecasting model, especially since the inflation forecast is the intermediate policy target. But the argument that it should change policy direction based on the latest announced inflation number is based on a misunderstanding of the inflation-targeting concept.