The gap between consumers’ current perception and their expectation of the macroeconomic situation, which was stretched to its widest level in the consumer confidence survey during the pandemic, is now closing rapidly, according to RBI Deputy Governor M.D. Patra

This phenomenon was last seen in 2019, before the onset of the pandemic. 

“The scars of the pandemic are deep but they are healing, and consumers, who make up around 60 per cent of GDP, are getting their groove back.

“Seen from this perspective, the future does look a little brighter and the messages from the survey are a little more credible, emboldening us to expand its coverage into rural areas,” Patra said in a speech delivered during the Statistics Day Conference at RBI, Mumbai, on June 30.

Optimistic about the future

The Deputy Governor said the results have been interpreted as consumers being eternally pessimistic about the current situation, but ever optimistic about the future – the indomitable power of hope, rather than an objective assessment of the underlying macroeconomic situation and outlook.

“What is not focused on is the gap between current perceptions and expectations…it is now closing rapidly,” he said. 

Patra observed that in a flexible inflation targeting framework, forecasts also perform the role of communication tools, giving the public a sense of the future direction of monetary policy, besides being intermediate targets.

Consequently, public attention tends to be focused on these forecasts and near-term deviations from actual outcomes, and are the subject of animated debate.

“Some caveats are in order here. First, the overlapping shocks of the pandemic and the war in Ukraine resulted in massive structural disruptions, including gaps in data availability, which produced large and persistent, but unavoidable errors.

“Second, a large portion of deviations, when they occur, stem from the exogenous assumptions we set as initial conditions. These assumptions relate to the price of crude oil, the exchange rate of the rupee, the monsoon, global growth, the fiscal stance and changes in structural policies, all of which are determined outside our forecasting framework and arguably, outside the realm of domestic monetary policy,” the Deputy Governor said.

Third, forecast errors are used as a learning experience by RBI, resulting in correctional steps and additional information gathering – incidentally, the RBI publishes these deviations regularly and explains the reasons underlying them, as mandated in legislation and/ or supporting regulations.

Also read: Consumers expect inflation to remain high: RBI survey

“In fact, this has resulted in our near-term forecasts becoming increasingly accurate over time. Fourth, our analysis of forecast errors indicates there is no systematic bias and that they are offsetting when assessed over a sufficiently long-time span,” Patra said.

Although monetary policy has an exclusive domestic orientation, it is framed in a dynamic international environment, replete with spillovers and spillbacks, emphasised the Deputy Governor.

He said it is in this context that external sector statistics serve as a beacon of light, showing monetary policy makers the way forward in navigating formidable global tides.