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Retail inflation forecast for April 2015-Sept 2018 erroneous: RBI Research

IANS  |  Mumbai 

A RBI Research Report has found errors in the projections of the apex bank's committee (MPC), especially for the period between April 2015 and September 2018.

According to the report, cross-country studies show higher forecast errors when share of is high in the CPI (Consumer Price Index).

The case-in-point is the retail projections from April 2015 to September 2018 which had shown two periods of large projection errors associated with unanticipated sharp fall in inflation, especially in veggies.

Under the present policy framework, forecasts are critical for the conduct of forward-looking as they play a special role in an inflation targeting framework by acting as an intermediate target.

Hence, the significance of accurate forecasts can hardly be overemphasised, said the report.

The bi-monthly resolutions of the MPC of the RBI provide inflation forecasts for up to four quarters ahead.

The Report (MPR), released twice in a year (April and October), provides inflation forecasts for up to eight quarters ahead.

Inflation forecasts were also an integral part of monetary policy communication even before the adoption of the flexible-inflation targeting framework in 2016, but they assumed a special significance under the FIT regime.

As per the report, the CPI inflation projections from April 2015 to September 2018 shows two periods of large projection errors associated with unanticipated sharp fall in inflation, especially in veggies.

An examination of the CPI inflation projections in during April 2015 to September 2018 showed two periods of large projection errors, -- October 2016 to March 2017 and June-September 2018.

Both episodes were associated with unanticipated sharp fall in particularly in case of perishables, stated the report titled "Inflation Forecasts: Recent Experience in and a Cross-country Assessment".

The analysis also indicates that globally, since the 2008 financial crisis, a phenomenon of over prediction has been observed, with actual inflation undershooting forecasts.

In the case of India, the mean forecast error was somewhat negative (actual inflation undershot the inflation forecasts). Including the period of demonetisation, bias in the forecast errors turns out to be statistically significant.

The forecasts by the RBI staff have been by and large efficient, though there have been deviations of actual inflation from the forecasts.

--IANS

ana/sn/rs/bg

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Fri, May 03 2019. 22:16 IST
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