Data revisions can mislead policymaking: RBI

India's central bank chief on Tuesday voiced concern about sharp revisions in macroeconomic data, including growth and inflation figures, which can disrupt calculations when setting policy.

The Reserve Bank of India (RBI) has raised interest rates 10 times since March 2010 to control inflation that has consistently outrun its forecasts. India's most widely watched monthly inflation yardstick, the Wholesale Price Index (WPI), has been revised upward, sometimes sharply, in recent months. Many economists expect an upward revision of 30 to 40 basis points to the provisional 9.06% figure for May. "Each time when we have to make an assessment of inflation situation, we are left to double guess how the provisional numbers may be revised upwards," RBI Governor Duvvuri Subbarao said in a speech. The Index of Industrial Production (IIP) is also prone to sharp revisions. "When we were making policy the IIP number available to us in February 2010 was 6.8 percent, whereas the economy was actually growing much faster," he said. "Provisional numbers which are off mark by significant margin can mislead policy calculation," he said. Subbarao added that such revisions were also factors behind the central bank making inflation projections that proved to be below the actual number in the last fiscal year. "Last year RBI's inflation projections were systematically below the actual outcome," Subbarao said. Factors that led to the miscalculation included higher-than-expected gains in oil and other global commodity prices and a lower than expected decline in food prices despite a normal monsoon, he said. He also cited "erroneous signals from the then-available IIP data which suggested moderation in growth and demand," as well as "larger than usual upward revision to the past inflation data." The RBI had initially projected inflation to be at 5.5% by end of March 2011 but subsequently revised it upwards to 7% and then later to 8%. Ultimately, March-end inflation was revised upwards in June to 9.68% from 8.98% in April. Generally, private inflation forecasts were much closer to what was ultimately reported for the last fiscal year. The March IIP number was revised to 7.8% in June from 7.3% released in May, while a sharper revision was seen for December IIP, which was upwardly revised to 2.5% from an initial reading of 1.6%. Analysts have often expressed their discomfort over such sharp revisions. "Large systematic revisions for nearly six months in WPI shows there is a need to revisit the methodology of compiling it," said Siddhartha Sanyal, chief India economist at Barclays Capital. "Central banks now are trying to come out with swift policy response. But if there are such sharp revisions, then either the central bank will have to guess the revision amount while taking a policy response or have to revisit the policy response after the final numbers are out," Sanyal said. Some economic data that is widely used elsewhere, such as on retail sales, employment and housing, is not regularly compiled in India, adding to the challenge of policy making in Asia's third-largest economy. Subbarao also said that though there was merit in using the consumer price index (CPI) as a yardstick for inflation -- as is the practice in most economies -- there is no single representative CPI measure for the whole country. "There is merit in this criticism. It is not entirely erroneous. Conceptually CPI is a better indication of demand side pressure than WPI," Subbarao said.