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Business News/ Markets / Mark To Market/  As RBI’s forecasts miss their mark, rate cut predictions could turn harder
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As RBI’s forecasts miss their mark, rate cut predictions could turn harder

During 2011-2013, the RBI was pulled up for consistently underestimating headline inflation
  • Markets were taken aback by the RBI’s decision to pause this time as most had priced in a cut owing to weak GDP growth numbers
  • The RBI has revised its growth forecast for FY20 four times, pulling it lower every time. (Aniruddha Chowdhury/Mint)Premium
    The RBI has revised its growth forecast for FY20 four times, pulling it lower every time. (Aniruddha Chowdhury/Mint)

    entral banks are looked upon for clarity and their forecasts of growth and inflation are a potent way to clear the fog.

    The Reserve Bank of India (RBI) has been dropping the ball on this, and did so yet again on Thursday.

    During 2011-13, the central bank was pulled up for consistently underestimating headline inflation.

    In the current fiscal year, RBI seems to have consistently overestimated gross domestic product (GDP) growth.

    Graphic by Naveen Kumar Saini/Mint
    View Full Image
    Graphic by Naveen Kumar Saini/Mint

    In under a year, the central bank has revised its growth forecast for FY20 four times, pulling it lower every time.

    That is not all. The latest downward revision of GDP growth by 90 basis points is perhaps the sharpest in a long time. The central bank’s forecast now is perhaps more pessimistic than most at 5%, but its rate-setting committee has voted unanimously to hold rates. The reason is that headline retail inflation could be higher than what was expected. Of course, the central bank revised its inflation forecast upwards.

    What does this mean for the markets?

    It could become challenging to predict monetary policy, since the forecasts on which the stance and the decisions are based are prone to frequent changes. Markets were taken aback by RBI’s decision to pause this time, as most had priced in a policy rate cut owing to weak GDP growth numbers.

    To be fair, forecasts are not etched in stone and are bound to go wrong sometimes. Revisions in forecasts are also expected as central banks take cognizance of fresh data.

    Even so, the rise in the frequency and the magnitude of RBI’s forecasts is a concern.

    The central bank has the wherewithal to access granular data beyond what is in the public domain. Given this edge, markets expect it to offer an accurate assessment, as well as projections.

    Having seen a series of fast downward revisions, economists are sceptical about the 5% forecast, too.

    Economists at Nomura Financial Advisory and Securities India Ltd expect growth to disappoint the central bank again.

    “We expect growth to continue to disappoint the RBI and are not convinced that ‘green shoots’ are genuine; we expect growth to disappoint both in FY20 and FY21, due to the triple balance sheet problem," the brokerage firm said in its note dated 5 December.

    Nomura India expects GDP growth to be 4.9% for FY20.

    Even as growth forecasts have become shaky, projecting headline retail inflation could become a challenge for RBI as food inflation plays truant.

    In the coming months, it would be best to take forecasts by the central bank with a pinch of salt.

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    Published: 06 Dec 2019, 05:57 PM IST
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