The Reserve Bank of India (Photographer: Dhiraj Singh/Bloomberg)
A discussion paper from the Reserve Bank of India (RBI) on January 10 said the upside risk to the consumer price index (CPI) inflation is relatively more than the downside risks to it.
“In the flexible inflation targeting (FIT) period, upside risks to CPI headline inflation have declined to a level of 6.5 percent from a double-digit level preceding it and have remained stable,” the discussion paper said.
It further added that since there is a downward shift in the conditional distribution, the downside risks to inflation have increased and have remained around 1.5 percent.
The RBI released the working paper titled ‘Tail Risks of Inflation in India’, which was co-authored by Silu Muduli and Himani Shekhar.
The discussion paper said while examining the shift of the conditional distributions of inflation in response to various domestic and global shocks so as to analyse tail risks of CPI-C inflation, this study reveals that an increase in household inflation expectations, domestic real GDP growth, and global non-fuel price inflation uniformly shifts the distribution to right, leading to the higher upside and lower downside risks to inflation.
"Easy financial conditions have an asymmetric impact on the conditional distribution, particularly raising the upside risks to inflation," the paper said.
Given the macroeconomic environment as of December 2019, the average lower and upper tail values of CPI headline inflation are 0.48 percent and 6.04 percent, respectively, the paper added.
Food, which is a major component of the CPI basket, has higher volatility owing to supply-side issues and the monsoon dependence of Indian agriculture.
So, any disruption in weather patterns gets reflected in production, and in turn, prices.
"In such times of uncertainty, along with the mean path of future inflation, the distribution of inflation becomes crucial in the assessment of inflationary conditions. The inflation distribution may help in a proper assessment of the upside and downside risks to inflation," the discussion paper noted.
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