RBI Is Still Struggling With the Country’s New GDP Figures

While it’s the job of every central bank to find the fine balance between growth and inflation, India’s top central banker says he’s feeling a bit wobbly, as he’s uncertain how to read the country’s recently revised gross domestic product numbers.

Most indicators suggest inflation in Asia’s third-largest economy has cooled in the last year, but economists aren’t confident they know whether the economy is struggling with a slowdown, about to overheat or somewhere in the middle.

“Uncertainty about the true value of macroeconomic variables is a formidable challenge for policy making,” Mr. Rajan wrote in the monetary policy report. “The recent revisions in national accounts pose a challenge in terms of assessing the state of the business cycle and the position at which the economy is poised on it.”

Earlier this year, India’s Central Statistics Office surprised economists by announcing that a radical revamping of the way GDP is calculated meant growth in the fiscal year ended last month was likely 7.4%. That was not only about two percentage points higher than earlier estimates for that year, but it also made India the fastest-growing big economy in the world as its expansion rate surpassed that of China.

If you take the sharp rebound at face value, then the country may not need more interest rate reductions. Extremely hawkish observers theoretically might even worry further rate cuts could reignite India’s inflation problems. But many economists are skeptical about the new growth numbers.

As he left rates unchanged Tuesday, Mr. Rajan pointed to his struggle gauging economic growth.

“The magnitude of the gap in real GDP growth rates between the old and the new series for 2013-14 and 2015-16 has complicated the setting of monetary policy,” he wrote. “These data cloud an accurate assessment of the state of the business cycle and the appropriate monetary policy stance: particularly, they render forecasting tenuous.”

But forecast one must.

In its first official nod to the new numbers, the central bank upgraded its expansion forecast for India’s economy to 7.8% for the year started April 1. That represents growth from 7.5% in the year just ended but is still well below New Delhi’s official projection of expansion between 8.1% and 8.5%.

Mr. Rajan said the new high growth rates aren’t reflected in many other economic indicators. While the new GDP figures suggest strength in the property, financial and manufacturing industries, companies in these sectors say they have been struggling with weak demand.

The RBI governor’s latest moves—two surprise rate cuts in as many months—suggest he does not believe the economy is booming.

Back in February, soon after the new GDP numbers were released, Mr. Rajan said it was too early to “take a strong view” on the numbers.

He still doesn’t seem to have much confidence in his ability to find equilibrium using the reworked figures.