No systematic bias in inflation forecasts, asserts RBI dy guv Poonam Gupta

RBI Deputy Governor Poonam Gupta said MPC inflation and growth forecasts show no directional bias and outlined the central bank's multi-model forecasting approach

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The inflation forecast of the Reserve Bank of India (RBI) used in the Monetary Policy Committee (MPC) resolution are “unbiased”, and the deviation of inflation and growth forecasts of the MPC during the inflation-targeting regime does not have any systematic directional bias from the realised inflation and growth, RBI Deputy Governor Poonam Gupta said on Wednesday.

 

Speaking at an event in Mumbai, Gupta said: “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.”

 

India’s central bank provides forward-looking inflation as well as gross domestic product (GDP) forecasts. During the October monetary policy meeting, the RBI projected consumer price index (CPI) inflation for 2025-26 (FY26) to be at 2.6 per cent, with the second quarter (Q2FY26) at 1.8 per cent; Q3FY26 at 1.8 per cent; and Q4FY26 at 4 per cent. Further, CPI inflation for Q1FY27 is projected at 4.5 per cent.

 

Similarly, the RBI has projected India’s real GDP growth to be 6.8 per cent in FY26, with Q2FY26 growth at 7 per cent; Q3FY26 at 6.4 per cent; and Q4FY26 growth at 6.2 per cent. Further, India’s real GDP growth in Q1FY27 is projected at 6.4 per cent.

 

“…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 bimonthly MPC resolution provides forecasts of inflation and growth up to four quarters ahead,” Gupta said.

 

She also highlighted that any forecasting exercise, by its very nature, has the risk of incurring forecast errors, and such errors are a common feature around the world.

 

“Inflation forecasting is equally challenging in India, if not more so, given the high and outdated weight of food in the CPI basket, and the volatile nature of food prices,” Gupta pointed out.

 

She further highlighted that the RBI takes a multifaceted approach in forecasting inflation, including using a suite of structural and time-series models, examining historical patterns in data to identify the underlying momentum in prices, and assess the base effects, which often shape near-term inflation dynamics. The RBI also draws upon a wide range of high-frequency indicators and surveys to capture real-time movements in demand, supply, and their implications on prices. The central bank 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, adding that the RBI has extended the scope of stakeholder consultations.

 

The deputy governor also highlighted that the central bank takes the critique of RBI’s forecasts seriously. “We are looking for models, into practices that we are using to forecast inflation, and (working on) how we can do better,” she said.

 

Gupta also cautioned that any kind of forecasting has the risk of error, and that there is no forecaster globally who get it right every time. She added that the upcoming revisions from the Ministry of Statistics and Programme Implementation (Mospi) on CPI would be of critical importance in RBI’s forecasting.

 

Additionally, she detailed how the RBI uses a varied set of approaches to generate its growth projections. “The RBI relies on a balanced synthesis of robust econometric analysis, contemporary economic conditions, and forward-looking sectoral perspectives in preparing its projections,” she said, adding that among the technical models, projections are derived from a suite of approaches, rather than any single model, and these include the benchmark indicator approach, a dynamic factor model, and various time-series models for short-term growth projections.

 

Separately, Gupta said that the RBI is looking to come out with data on India’s balance of payments (BoP) on a monthly basis. Currently, this data is available on a quarterly basis. BoP gives a picture of the country’s external position — it records all inflows and outflows of foreign exchange, showing whether a country is a net receiver or net spender of foreign currency.

 

“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,” Gupta said, adding that to facilitate timely and more frequent availability of India’s BoP statistics, the time lag in the release of the quarterly statistics has been brought down from 90 days to around 60 days beginning Q1FY26.

 

“This was achieved by optimising the data reporting timelines, and streamlining the internal processes,” Gupta said. 

Gupta also mentioned that the flow of financial resources to the commercial sector from non-bank sources is almost equal to the traditional banking sources. While commenting that external commercial borrowings and foreign direct investments are additional sources of resources to the commercial sector, she said, “During 2024-25, just a little less than half (48.7 per cent) of total resources to the commercial sector were mobilised from non-bank sources.”