MPC members can start with near-term interest rate forecasts, says Jayanth Varma

India's headline retail inflation rate was 7.04 percent in May, according to data released earlier this month. The rate has exceeded the medium-term target of 4 percent for 32 consecutive months.

It was also the fifth month in a row that inflation was higher than the 6 percent upper limit of the 2-6 percent inflation mandate of the RBI. The central bank's latest forecasts suggest it will fail to meet its inflation mandate later this year.

Fed's forecasts

The most famous set of interest rate forecasts comes from the US Federal Reserve. These projections, popularly called the dot plot, detail the Federal Open Market Committee (FOMC) members' – voting and non-voting – assessment of the appropriate mid-point of the federal funds rate target range at the end of the current and upcoming couple of calendar years as well as in the longer run.

The latest projections, released on June 15, showed the median forecast of FOMC members was that the federal funds rate target range would be 3.25-3.50 percent by the end of 2022. In March, the forecast was 1.75-2.00 percent.

The US Federal Reserve's dot plot is a key monetary policy guide for financial markets, who often alter their expectations of future interest rate action after seeing changes in the dot plot.

While the US central bank publishes these interest rate forecasts – along with those for GDP growth, unemployment rate, inflation, and core inflation – four times a year, the RBI publishes only an inflation and growth forecast six times a year. However, the RBI's inflation forecasts have come under fire over the years – initially for being overestimates and more recently, underestimates.

According to Abhiman Das, now a professor at Indian Institute of Management-Ahmedabad after spending over 20 years in the RBI's statistics department working closely on its inflation forecasts, the lack of independent examination of the central bank's analysis by the MPC's external members is a big worry.

"The external members right now come and sit at the RBI for two-three days," Abhiman Das told Moneycontrol last month. "Whatever the RBI staff come and tell them becomes the projection. But who says that projection is right?"

According to Varma, "a lot of preparation and hard work" is needed from the RBI and the MPC members to come out with interest rate forecasts.

"The MPC statement does include fan charts of projected inflation and growth which provide information about both the expected path as well as the range of uncertainty. Individual members' views might reflect different nuances," Varma told Moneycontrol.

"Moreover, the projections about the policy rate would also depend on the individual member's views on the trade-off between inflation and growth as well as the persistence of both inflation and inflation expectations," he added.