Monetary policy staring at info constraints: Patra

The conduct of monetary policy in India faces hurdles stemming from information constraints and the manner in which data is covered in the country, Reserve Bank of India (RBI) Deputy Governor Michael Patra said on Thursday.

“A vast literature exists that seeks to explain the end- product... that is the monetary policy deci- sion. I’m going to take a step back and explore the manner in which committee members think and deliberate in order to come to that judgement,” Patra said at the State Bank of India Banking and Economic Conclave.

“There are severe information constraints that the monetary policy faces — data coverage, frequent revisions, lags, etc, so the driver can never determine the speed of the car,” he said.

Patra, who is Deputy Governor in charge of monetary policy, said a policymaker must decide on the basis of “vintage” data where relevant goal variables of the committee would be in the future. The policymaker has to then “shoot blind” at an angle that ensures that the target is met, Patra said.

The senior central banker flagged the risk of inflation data being prone to unforeseen shocks, which could sometimes influence the data as soon as its release.

“The moment inflation is released by the National Statistics Office (NSO), it gets hit by unanticipated shocks — Ukraine, food,

The senior central banker flagged the risk of inflation data being prone to unforeseen shocks

energy prices rising, etc. So, the moment it leaves the Statistics Office, it’s prone to shocks and to change,” he said.

“Furthermore, these goal variables are not actually static. They are moving over time and that path is unknown because they can be thrown off course by those shocks,” he said.