Formulation of monetary policy is a challenging task in an uncertain environment due to lags in data, frequent reviews and revisions, informational constraints, and difficulty to forecast in a volatile environment, said Reserve Bank of India Deputy Governor Michael Patra.

“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,” he said at the SBI Banking and Economics Conclave on Thursday.

“There are many slippages in the transmission of these rates. So, for monetary policy to be effective, it needs to take into account these lags. Hence, monetary policy can only target future inflation, not yesterday’s.“

Monetary policy cannot influence the growth rate on its own, and can only target future inflation which, in turn, is also based on forecasts with inherent uncertainty, said Patra, adding that at any point in time the variables of growth and inflation are not visible to the monetary policymakers.

“I can’t see my variables. On the basis of one-month and three-month ago data, I have to assess what inflation and growth is going to be one year down the line,” he said.

Even once the data is released by the National Statistical Office, the monetary policy committee could need to contend with shocks such as the Ukraine-Russia war, surge in oil and food prices and other externalities, which makes forecasting even more difficult.

Patra added that the monetary policy committee will begin deliberations on the upcoming monetary policy statement — the outcome of which will be announced on December 7 — in the coming week. For this, the MPC members will have to depend on the inflation data for October and growth data for July-September which will be released on November 30.

“Another complexity to this whole tightrope walking is that the whole data from NSSO (National Sample Survey Office) from 3 months ago are subject to revisions. And sometimes the change is drastic,” he said, adding that while data is based purely past behaviour, forecasts need to be well thought out and researched.

On a lighter note, Patra concluded that if the NSSO and corporates have the right to revise their figures and earnings, the monetary policy committee should also be able to change the interest rate of the September policy.

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