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MPC members can start with near-term interest rate forecasts, says Jayanth Varma

Jayanth Varma has backed up his comments in the minutes of the Monetary Policy Committee's June 6-8 meeting, where he had said the time is ripe for members to start providing projections for the policy rate.

June 23, 2022 / 03:08 PM IST

Jayanth Varma, one of the three external members of the Reserve Bank of India's Monetary Policy Committee (MPC), has said the rate-setting panel's members should start taking the first steps to providing interest rates projections by initially giving their individual views on where they see the policy rate in the near-term.

"I believe it is possible to start with baby steps and proceed gradually towards the desired goal," Varma told Moneycontrol via e-mail. "It is possible to start with projections only for the next quarter and slowly expand the horizon. It is possible to begin with broad ranges for the policy rate and then progressively refine the range. These are all matters of implementation detail. The important thing is to have a consensus on whether this is worth doing."

Varma's comments come after he was cited as saying in the minutes of the June 6-8 meeting, released on June 22, that the time was "ripe" for the committee's members to start moving towards providing projections of the future path of the policy rate. This, according to the Indian Institute of Management-Ahmedabad professor, would help in stabilising long-term bond markets and anchor inflation expectations.

The MPC increased the repo rate by 40 basis points in an unscheduled meeting on May 4 and by 50 basis points on June 8, leading to speculation over how many rate hikes will be announced to curb inflation. Economists expect the repo rate to be anywhere between 5.5 percent and 6 percent by the end of FY23.

India's headline retail inflation rate was 7.04 percent in May, according to data released earlier this month. The rate has exceeded the medium-term target of 4 percent for 32 consecutive months.


It was also the fifth month in a row that inflation was higher than the 6 percent upper limit of the 2-6 percent inflation mandate of the RBI. The central bank's latest forecasts suggest it will fail to meet its inflation mandate later this year.

Fed's forecasts

The most famous set of interest rate forecasts comes from the US Federal Reserve. These projections, popularly called the dot plot, detail the Federal Open Market Committee (FOMC) members' – voting and non-voting – assessment of the appropriate mid-point of the federal funds rate target range at the end of the current and upcoming couple of calendar years as well as in the longer run.

The latest projections, released on June 15, showed the median forecast of FOMC members was that the federal funds rate target range would be 3.25-3.50 percent by the end of 2022. In March, the forecast was 1.75-2.00 percent.

The US Federal Reserve's dot plot is a key monetary policy guide for financial markets, who often alter their expectations of future interest rate action after seeing changes in the dot plot.

While the US central bank publishes these interest rate forecasts – along with those for GDP growth, unemployment rate, inflation, and core inflation – four times a year, the RBI publishes only an inflation and growth forecast six times a year. However, the RBI's inflation forecasts have come under fire over the years – initially for being overestimates and more recently, underestimates.

According to Abhiman Das, now a professor at Indian Institute of Management-Ahmedabad after spending over 20 years in the RBI's statistics department working closely on its inflation forecasts, the lack of independent examination of the central bank's analysis by the MPC's external members is a big worry.

"The external members right now come and sit at the RBI for two-three days," Abhiman Das told Moneycontrol last month. "Whatever the RBI staff come and tell them becomes the projection. But who says that projection is right?"

According to Varma, "a lot of preparation and hard work" is needed from the RBI and the MPC members to come out with interest rate forecasts.

"The MPC statement does include fan charts of projected inflation and growth which provide information about both the expected path as well as the range of uncertainty. Individual members' views might reflect different nuances," Varma told Moneycontrol.

"Moreover, the projections about the policy rate would also depend on the individual member's views on the trade-off between inflation and growth as well as the persistence of both inflation and inflation expectations," he added.
Siddharth Upasani is a Special Correspondent at Moneycontrol. He has been covering the Indian economy, economic data, and monetary and fiscal policies for nine years. Contact:
first published: Jun 23, 2022 03:08 pm
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