The mystery of lower food inflation

We need more synchronisation between market understanding and RBI communication, lest we fall into the familiar trap of signal extraction

Like the night sky, our stars keep moving. To respond to an evolving macroeconomic environment and set monetary policy appropriately, we keep track of the changes in the underlying state of the economy. Regularly explaining our view of the stars helps financial market participants and others better understand our analytical framework and policy decisions.”

These words by a Reserve Bank of New Zealand assistant governor sum up the two most important unobservable trends impacting monetary policy setting in India. First, the puzzling behaviour of food inflation consistently undershooting even from the most conservative projections. Related to it is also the stickiness