Bloomberg estimates peg India inflation much lower

The RBI MPC is currently in a special huddle about the reasons for the inflation not coming under control. The final outcome of the meet will be known on 03rd November, when the RBI will issue a statement after also reading the sub-text of the Fed policy statement. The RBI will have to explain to the government about the reasons why it had not been able to contain inflation. For instance, the median target for inflation is 4% with the outer limit at 6%. However, India consumer inflation has overshot the 4% median target for 34 months in a row and the 6% upper target for 9 months in a row. That is a huge spillage.

However, there is now some hope for RBI that things may not be as bad as it appeared on first count. A recent report by Bloomberg highlights that the Indian inflation numbers might be better than official data suggests. According to the Bloomberg report, the current inflation number does not factor in the impact of government free food program. Once that is factored in, the actual rate of inflation could taper by 125 to 150 basis points. That would make a huge difference to the overall inflation figure, the calculation of the real rate of returns and a recalculation of the cost of capital to evaluate present value of equities.

Bloomberg in a press release suggested that the RBI may not have much to explain to the government as the actual inflation would now be in a more comfortable range. According to the Bloomberg estimates, once the government food program is factored in, inflation could fall by an average of 1.5% for the 12 months through March 2021 when the free food program is accounted for. If that is calculated, the RBI would be in breach of the limits only since April and not since January as is now being made out. It may emerge that the inflation did not overshoot for 3 quarters as the current data suggests about inflation policy.

There is another way of looking at this whole scenario. According to Bloomberg, RBI has been often criticized for waiting for too long before embarking on rate hikes. However, if this is factored in, it may imply that the RBI may have actually initiated its rate hike cycle earlier than required. By not accounting for the food program, the consumer price data had overestimated inflation since 2020. After all, between April 2020 and September 2022, the free food program had accounted for 22% of India’s rice consumption and 14% of the wheat consumption. That surely deserves to be factored in to get a clearer picture.