Only Future, And Not Current Inflation, Can Be Addressed By Monetary Policy

Only Future, And Not Current Inflation, Can Be Addressed By Monetary Policy

According to Michael Debabrata Patra, the Deputy Governor of the Reserve Bank of India (RBI), monetary policy can expect to tackle future inflation, not current inflation. On Thursday, he stated that monetary policy is, by its very essence, a technical part of economic policymaking and that it must be progressive while addressing the ninth State Bank of India (SBI) Banking and Economics Conclave taking place in Mumbai.

Michael Debabrata Patra said that creating monetary policy seems difficult, particularly in a dynamic market such as the one they are currently in, where lagging data are constantly evaluated.

The Reserve Bank of India will meet to discuss monetary policy again in the 1st week of December. According to the Deputy Governor, the RBI Monetary Policy Committee Meeting will discuss the growth and inflation figures for July through September.

Inflation is now at heights never before seen in forty years, defying strong and front-loaded global monetary policy transitioning from a lower-inflation to a higher-inflation environment for good worldwide, which is the ultimate dilemma. The moment has arrived to rethink monetary policy’s goals.

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Forecasts can just be made for the time to come; however, they are reliant on data from 1 to 3 months earlier, according to Michael Debabrata Patra. He stated that the goal variables have been changing gradually; thus, monetary policymakers had to keep their present positions in mind and their unknown future trajectory. Goal variables may also be pushed off track by unexpected shocks that struck them in the future.

He claimed that in this difficult scenario, monetary policymakers must sort via a vast amount of data, including high-frequency indicators, surveys that look into the future, aspirations of market participants, expert forecasters, and analysts, econometric models, and sentiment analysis centered around Artificial Intelligence (AI) as well as Machine Learning (ML) techniques, all to predict the most expected future course of the goal variables.

He added that there is a growing body of research on the novel method of textual analysis, which tests economists and offers fresh perspectives on the formulation of monetary policy. The RBI used text-mining tools to analyze the minutes of the Monetary Policy Committee at various textual levels to perform studies regarding the communication of the monetary policy.

According to the preliminary report, the minutes’ duration increased in 2019, possibly due to discussions about rate cuts, as well as in the years immediately following various coronavirus waves and the beginning of the conflict in Ukraine. The minutes were also fairly readable, and readability levels were continuously maintained. After the Ukraine war, internal and external parties’ attitudes weakened.

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