RBI Reworks Criticized Inflation-Forecasting Model

The adjustments incorporate fiscal-monetary dynamics, India's unique and often chaotic fuel pricing regime, and exchange-rate fluctuations and their impact on balance of payments

The Reserve Bank of India said it has revised its inflation-forecasting model to better capture how fiscal and monetary policy interact with real-economy elements. The adjustments incorporate fiscal-monetary dynamics, India's unique and often chaotic fuel pricing regime, and exchange-rate fluctuations and their impact on balance of payments, the Reserve Bank of India said in its latest bi-annual monetary policy report published Wednesday. Dubbed as the Quarterly Projection Model 2.0, the RBI's economists describe the framework as a forward-looking, open economy, calibrated, new-Keynesian gap model. The previous version had often been criticized for over-estimating upside risks to inflation. The amendments come just days after the RBI won approval from the government to retain its 2 per cent-6 per cent inflation target range for the next five years. It didn't offer a comparison between inflation rates predicted under the previous model and the new one, but said its tools helped it keep inflation anchored around the 4 per cent midpoint on average in the past five years.