Following consistent revisions in consumer price index inflation projections, Viral Acharya, the deputy governor of the Reserve Bank of India, conceded that the central bank is quite introspective about these errors.

The RBI, once again, revised it’s projections for headline inflation to 2.8 percent for the fourth quarter of the current financial year and to a range of 3.2 percent to 3.4 percent in the first half of 2019-2020.

In a media interaction after the Monetary Policy Committee cut the repo rate by 25 basis points to 6.25 percent, Viral Acharya addressed the criticism over the RBI’s off-the-mark inflation projections. Acharya said that in economies with a higher weightage of food in the basket, central banks tend to make larger errors.

“RBI’s study shows that once you control for the fact that the Indian food basket is very volatile, the relative errors that the central bank makes are not very large,” Acharya said, adding that the central bank should take this criticism seriously.

RBI Working At Improving Inflation Forecast Efficiency

Acharya said the central bank had sub-groups within the econometric modelling team to focus on individual items through the RBI’s regional offices. The modelling team, he said, is trying to get an early sense of the numbers released by the central statistics agency.

It was challenging for the central bank to make real-time projections based on supply numbers received once a year, Acharya said, adding that he hoped the RBI would get better over time.

He attributed surprises in inflation figures to demonetisation earlier and the supply glut now.