Poonam Gupta says that as far as the inflation forecasts used in the monetary policy committee (MPC) resolution are concerned, they are unbiased
Emphasising that variance across forecasters tends to increase during periods of uncertainty, Poonam Gupta, Deputy Governor, Reserve Bank of India has stated that Inflation forecasting is equally challenging in India due to the volatile nature of food prices.
Gupta highlighted that the high and outdated weight of food in the consumer price index (CPI) basket also poses challenge to the inflation forecasting. The deputy governor was delivering a speech at the pre-release consultative workshop on base revision of CPI, Gross Domestic Product (GDP) and Index of Industrial Production (IIP) at Mumbai.
“Any forecasting exercise, by its very nature, has the risk of incurring forecast errors. Such errors are a common feature around the world. These are generally larger when there are unpredictable shocks or events and are larger when one is predicting far ahead into the future,” Gupta highlighted.
Gupta added that besides minimising the 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 monetary policy committee (MPC) resolution are concerned, they are unbiased.
“Before each Monetary Policy meeting, we hold nearly a dozen discussions with stakeholders from the real sector, financial markets, banks, NBFCs, analysts, and economists. These interactions provide us with valuable insights into their perspectives, outlooks, and forecasts, which inform our assessments,” she explained.
The recently released discussion paper on review of the monetary policy framework shows that, the deviation of inflation and growth forecasts of the MPC in India during the inflation targeting regime does not have any systematic directional bias from the realised inflation and growth, she noted.
The deputy governor emphasised that RBI relies on a balanced synthesis of robust econometric analysis, contemporary economic conditions, and forward-looking sectoral perspectives in preparing its projections. Among the technical models, projections are derived from a suite of approaches, rather than any single model, she explained.
