Summary of this article
RBI deputy governor assets inflation forecast systems unbiased
Gupta explains processes RBI undertakes before releasing forecast
RBI looking to release balance of payments data monthly, Gupta says
Reserve Bank of India Deputy Governor Poonam Gupta has said that inflation forecasts used by the central bank’s Monetary Policy Committee (MPC) resolution are ‘unbiased’. The deviation of inflation and growth forecasts of the rate-setting panel during the inflation-targeting regime does not have any systemic or directional bias from the realised inflation and growth, she said.
She said at an event in Mumbai on November 26: “Besides minimising forecast errors, what is equally important is to ensure that there is no systematic bias in the forecasts. As far as the inflation forecasts used in the MPC resolution are concerned, they are unbiased."
The RBI provides forward-looking forecasts on consumer price index (CPI) inflation and gross domestic product (GDP) growth at their MPC meeting every two months.
“…Monetary policy operates with well-recognised lags in transmission, decisions taken today affect output and inflation over several quarters. For the MPC to fulfil its mandate effectively, it must, therefore, form a view not just of current conditions, but also of where the economy is likely to be in the near term. Therefore, the bi-monthly MPC resolution provides forecasts of inflation and growth up to four quarters ahead,” she said.
Gupta added that incurring any errors in forecasting was a common nature worldwide, and by nature, a forecasting exercise was prone to errors.
“Inflation forecasting is equally challenging in India, if not more so, given the high and outdated weight of food in the CPI basket, and the volatile nature of food prices,” she said.
She also highlighted that the central bank undertakes a multifaceted view while forecasting inflation, such as using a suite of structural and time series models, and examining historical patterns in data to identify the underlying momentum in prices. The central bank also assesses the base effects which often shape near-term inflation dynamics, she said.
The RBI also tracks a wide range of high-frequency indicators and surveys to get a grip on the movements in demand, supply, and the impact on prices in real time.
In addition, the RBI also seeks expert views to interpret turning points, structural breaks, and emerging risks that models alone may not be able to fully capture.
“We are committed to using state-of-the-art models and approaches to improve our forecast accuracy continuously. Thus, we have been assessing the appropriate time length that we should consider in our models, ensuring that we use more recent and relevant information than the distant past,” Gupta said.
“We have also extended the scope of our stakeholder consultations, wherein besides a detailed schedule of existing consultations, we have added a day-long workshop with a rotating set of professional forecasters so that we can learn from each other,” she added.
Gupta said that the central bank is looking to release data on India’s balance of payments (BoP) on a monthly basis. At present, the data is released on a quarterly basis.
“Going ahead, we will endeavour to prepare and release the monthly BoP statistics (albeit at a slightly more aggregate-level and at a lag of approximately 40 days). To achieve this, the data processing timelines of various reporting entities are being expedited and streamlined, and further internal cohesion is being established,” she further said.
