Reserve Bank of India (RBI) deputy governor Poonam Gupta on Wednesday dismissed concerns of any “systematic bias” in the central bank’s inflation projections, asserting that occasional forecast deviations are not unique to India but part of a global trend.
The RBI’s inflation forecasting has been under scrutiny from various economists who have pointed out that the gap between the central bank’s projections and actual numbers may have contributed to a hawkish approach to the monetary policy.
Highlighting a gap between actual CPI and inflation projections by RBI, a recent research report authored by Soumya Kanti Ghosh, group chief economic advisor, SBI, had said, “the average downward revision between final and first RBI projection of inflation forecast is -120 basis points.
“Even after such downward revisions, there is still a gap between the actual CPI and the final projection. The average upward revision also comes at 110 basis points. Such a gap complicates monetary policy decisions”.
Speaking at a pre-consultative workshop on base revision of CPI, GDP and IIP in Mumbai on Wednesday, RBI deputy governor Gupta said that the central bank takes a multifaceted approach in forecasting inflation, combining structural and time series models on the economy, examining historical patterns in data along with surveys and expert inputs to arrive at the inflation number.
Gupta, however, said that any forecasting exercise has the risk of incurring errors, and such errors are common globally and larger, especially when there are unpredictable shocks.
Outdated weights of food in the CPI basket and the volatile nature of food prices add to the challenge of inflation forecasting in India.
“Besides minimising the forecast errors, what is equally important is to ensure that there are no systematic biases in the forecasts. As far as the inflation forecasts used in the MPC resolution are concerned, they are unbiased,” Gupta said.
She added that the recently released discussion paper on review of the monetary policy framework shows that the deviation of inflation and growth forecasts of the monetary policy committee in India during the inflation targeting regime does not have any “systematic directional bias” from the realised inflation
and growth.
Frequent BoP data
The deputy governor disclosed that the central bank is working towards releasing balance of payments (BoP) statistics on a monthly basis — an upgrade from the current quarterly schedule.
“We will endeavour to prepare and release the monthly BoP statistics,” Gupta said, adding that to achieve this, the data processing timelines of various reporting entities are being expedited and streamlined.
The RBI has already shortened the release lag for BoP data to 60 days from 90 days, and plans to go further.