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Lagged data, frequent reviews make monetary policy’s task challenging: RBI DG Patra


Michael D. Patra

Reserve Bank Deputy Governor Michael Patra on Thursday said formulating monetary policy is a challenging task in a volatile environment like the current one, given lagged data inputs, which are also frequently reviewed.

Mr. Patra said that next week, deliberations would be starting for the next policy review to be announced in the first week of December and will have to depend on inflation data for October and growth data for July-September coming out on November 30.

“Monetary policy has to be forward-looking, and that is because when the policy rate is changed, it takes quite a while before it reaches lending rates and aggregate demand in the economy. Hence, we can only target future inflation, not yesterday’s,” Mr. Patra said in a speech at the annual SBI conclave.

“On the basis of one month-ago and three month-ago data, I will have to assess what is inflation and growth going to be one year down the line,” he added.

Mr. Patra, who oversees the important monetary policy function at the central bank, said there are shocks like the war in Ukraine, and the jump in oil and food prices, which the monetary policy has to contend with after the release of the dated official data.

Additionally, there is the risk of frequent reviews as well, he rued, pointing out that in India, there are preliminary, partial, revised and final styles of account presentations.

“Another complexity to this whole tightrope walking is that the whole data on this data from NSSO (National Sample Survey Office) from 3 months ago are subject to revision. And sometimes, the change is drastic,” he noted.

He pointed to a quote from former Fed chairman Ben Bernanke pointing to the limited options that exist before the central bank in the case of such an outcome and stressed that the situation applied to India as well.

“If NSSO has the right to revise figures, if companies can change earnings numbers, I should also be able to change the interest rate of September (last policy),” Mr. Patra said to a round of laughter.

The RBI has also been deploying artificial intelligence and machine learning-based sentiment analysis tools lately which have come up with interesting findings, he added.

“In the period following the war in Ukraine, sentiment deteriorated among both internal and external members,” Patra said, adding that generally, members come up with longer texts for minutes during times of rate cuts.

He also made it clear that on its own, monetary policy cannot influence growth in an economy but it can create congenial factors which would support growth.

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