Reserve Bank of India’s Inflation Forecasting Model Under Scrutiny
The Reserve Bank of India’s inflation forecasting model is coming under increasing scrutiny from economists after the central bank consistently overestimated price pressures this year, contributing to a hawkish policy approach.
Inflation Forecasting Errors
The central bank’s inflation miss in the first three months of the year was 0.7 percentage points—the biggest gap in six years, and well above economists’ projections. Estimates in the subsequent two quarters have also been off the mark, by smaller margins of 0.2 and 0.1 points, respectively.
Impact on Monetary Policy
Economists predict another big miss in the current quarter after a surprisingly low inflation print in October. That means the RBI’s projection of 2.6% for the fiscal year through 31 March 2026, published as recently as in October 2025, is already looking out of date. UBS Group AG economist Tanvee Gupta Jain sees inflation ranging between 2% and 2.2% in the period, a historical low.
Consequences of Overestimation
The upshot is that the RBI has probably been more hawkish than necessary, economists say, and reluctant to cut interest rates even though the economy likely needed a boost after US President Donald Trump slapped 50% tariffs on Indian goods.
Reasons for Forecasting Errors
The main reason the RBI and economists have gotten inflation forecasts so wrong this year is because of the sharp drop in food prices. Harvests have been strong after a favourable monsoon season, while improvements in supply chain management have helped lower costs. Food makes up 46% of the consumer price index, which means it has an outsized impact on inflation outcomes. In October, food prices contracted a record 5.02% from a year earlier.
Limitations of the Forecasting Model
Another reason for the overestimation in inflation could be an outdated consumer price basket, which hasn’t been revised for over a decade. India’s Ministry of Statistics and Program Implementation will release an updated gauge early next year, helping to mitigate some of the forecasting errors.
Refining the Forecasting Model
The RBI updated its inflation forecasting framework in 2023, the so-called Quarterly Projection Model 2.0, which incorporated more detailed modeling of fiscal-monetary interactions, domestic fuel pricing, capital flows, exchange rates, and central bank interventions. The model is now being further refined with new data to enhance its “nowcasting and forecasting of key macroeconomic variables and developing more robust models,” Malhotra said in a press briefing after the first policy meeting he chaired in February.
Challenges in Forecasting
Soumya Kanti Ghosh, chief economic adviser at State Bank of India Group, and a member of the Prime Minister’s Economic Advisory Council, said with inflation remaining soft, the RBI likely missed an opportunity to take pre-emptive action in August and October. “With inflation forecasting on monthly basis remaining a difficult task, the audacity of long-term forecasting can only weaken central bank’s communication with market forces,” he said.
Conclusion
In conclusion, the Reserve Bank of India’s inflation forecasting model has been under scrutiny due to consistent overestimation of price pressures. The errors in forecasting have led to a hawkish policy approach, which may have been unnecessary. The RBI is refining its forecasting model to improve its accuracy, but challenges remain, including the limitations of the consumer price basket and the difficulty of forecasting inflation on a monthly basis. As the Indian economy continues to evolve, it is essential for the RBI to develop a more robust forecasting model to ensure effective monetary policy decisions.
