Comment | Who is right -- RBI or its panel of professional forecasters?

The reason for the Reserve Bank of India’s (RBI) 25 basis point rate cut was its assessment that inflation will remain very tame. The monetary policy statement says consumer price inflation will be 2.8 percent during January-March; 3.2 to 3.4 percent for April-September; and 3.9 percent during October-December. Since the RBI’s inflation target is 4 percent per annum, there’s ample reason for the central bank to cut rates.

But will inflation really be that low? The RBI conducts a survey of professional forecasters once every two months. The latest survey, the results of which were announced together with the monetary policy on February 7, doesn’t agree with RBI’s forecasts.

The RBI’s monetary policy statement says, “The short-term outlook for food inflation appears particularly benign, despite adverse base effects.” In sharp contrast, the survey of professional forecasters says, “Consumer price inflation is expected to increase in Q4 FY19, firm up further and remain above 4 percent in Q3 FY20.”

The survey’s median forecast of consumer price inflation is 3.1 percent for January-March; 3.5 percent for April-June; 4 percent for July-September; and 4.4 percent for October-December.

Of course, even the professional forecasters believe that inflation will continue to be below 4 percent till June, which could justify a rate cut. But its longer-term outlook for inflation is not so benign.

It will be interesting to see who will be right on inflation—RBI or its panel of professional forecasters.