RBI Deputy Governor Poonam Gupta has strongly defended the central bank's inflation forecasting process, asserting that there is no systematic bias in the projections made by the Monetary Policy Committee (MPC). She emphasized that inflation forecasting is inherently difficult everywhere, but particularly so in India due to the high weight of food in the Consumer Price Index (CPI) and the volatility of food prices. Gupta explained that the MPC must publish forward-looking forecasts up to four quarters ahead because monetary policy operates with significant lags, and forecast errors are inevitable, especially during periods of economic shocks or uncertainty. She noted that the central bank uses a multifaceted approach to forecasting, including proven models, historical patterns, surveys, and expert consultations with ministries and analysts. Gupta also pointed out that forecast errors are a global phenomenon and not unique to India, and that the RBI takes media and expert criticism seriously, even if some coverage is not always kind. In response to concerns about overestimation of inflation, which critics argue has prevented the RBI from cutting rates further, Gupta maintained that the forecasts are unbiased and not consistently skewed in any particular direction. She also mentioned that the RBI is reviewing the base years for GDP and the CPI basket, which will help improve the accuracy of future forecasts. Gupta further revealed that the central bank is planning to release balance of payments data on a monthly basis instead of quarterly, to provide more timely insights into India's external position amid shifting global trade dynamics. The RBI has already reduced the lag in quarterly data release from 90 to 60 days and is considering further improvements. Gupta acknowledged that both inflation and growth forecasts have been revised frequently in recent times, with past fiscal year GDP forecasts being too optimistic and retail inflation forecasts too pessimistic, but reiterated that these errors do not indicate a systematic bias. She stressed that minimizing forecast errors is important, but it is equally crucial to recognize that no forecaster gets it right all the time. The upcoming revision of the CPI basket by the Ministry of Statistics and Programme Implementation is expected to be helpful for the RBI's forecasting efforts. Gupta's comments come amid ongoing debates about the accuracy and reliability of the RBI's projections and their impact on monetary policy decisions.
Why it matters:
- Ensures transparency in monetary policy decisions
- Highlights global challenges in economic forecasting
Key Points
- No systematic bias in RBI's inflation forecasts
- Forecast errors are a global phenomenon
- RBI plans to release balance of payments data monthly
- Multifaceted approach to forecasting
- CPI basket revision underway
- Monetary policy works with lags
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