Read on Twitter
RBI DG is giving ammunition to opponents of flexible IT. By forgetting about the flexible part. Surprisingly, when CPI inflation fell below 2% he didn’t complain. The law and the rules leave enough discretion for the MPC to take a relaxed view of short term shocks to inflation. https://twitter.com/dugalira/status/1296392833708875777
What’s needed is some confidence in either near term inflation trends based on high frequency data. Or confidence in estimates thrown up by RBI’s own models. April MPR indicated 2.4% inflation in jan-mar 21. How much has it gone up for RBI to be chucking toys out of the pram?
Survey of Prof forecasters median est of CPI (prior to July CPI data) was ~3% for jan-mar 21. Even a 100-150 bps upside shock to that estimate still leaves inflation at 4-4.5% by March quarter. Hardly a disaster in terms of both inflation target and implied real rate.
This kind of jitteriness shown by RBI will spread to markets and undo some of the monetary transmission and credit spread compression that took place since March. Perhaps worries about stagflation will turn self fulfilling.
