Since the last Monetary Policy Committee meeting in June, facts have changed thick and fast. Do the economists on the MPC take a leaf out of Keynes or latch on to central bankers’ catchphrase during uncertain times – ‘data dependent’?
Actual inflation and growth – the most monitored macroeconomic indicators – have been testing the limits of forecasting models not only of the central banks’ but even the presumably more sophisticated investment banks. Throw in financial stability and it gets muddier.
When the Reserve Bank of India’s MPC which is mandated to target Consumer Price Inflation at 4% with a provision to move two percentage points on either side meets this week, it would face a few puzzles that may not have instant solutions.
After the breach last year and a note explaining to the government why it failed, the MPC was sitting pretty with easing inflation. All that appears to be turning with the ubiquitous tomatoes in the headline for turning scarce.
Economists are raising inflation forecast after the June CPI reading came in at 4.8% against the consensus estimate of 4.6%. In July it could climb to 6.7% and the September quarter average could be 5.8%, up from 4.8% earlier, said the Deutsche Bank.
While the headline numbers are ringing alarm bells, a peep below the surface may present a different picture. With farm products forming a substantial chunk of the CPI, seasonal factors may be at play. A 12.5% month on month jump in vegetable index was a significant factor in pushing up inflation, especially tomatoes which have risen fivefold in some markets. Tomatoes have turned bitter gourds. That may worry policy makers, but that’s also the comforting factor.
“The recent spike in tomato prices on account of crop damage due to inclement weather and pest attacks in the major production belts has received widespread attention as it has taken a toll on households’ budgets,” RBI said in its latest bulletin. “Tomato, being a highly perishable item with a very short crop duration, exhibits considerable seasonal variation in prices but these episodes are short lived.”
The average duration of a high price episode, shows that prices stay above ₹40 for an average of 2.6 fortnights while it stays below ₹20 for an average of 10 fortnights, said RBI signalling a possibility to read the tomato price spike as transitory.
Monetary policy decisions are made based on the outlook rather than past. If farm price increases are concluded as transitory, it is not an issue for the MPC to act.
The significance of the recent price spike lies in whether RBI raises its fiscal ’25 forecast of 4.5%. The MPC may draw comfort from falling global commodity, though Crude prices that have been helpful, may turn adverse amid production cuts and resilient economies.
As Governor Shaktikanta Das rolls his kaleidoscope, there may be a blur – a potential onion price spike as lower yields last season possibly led to lower acreage.