RBI uses multi-model, forward-looking framework to sharpen inflation, growth forecasts, says Deputy Guv Poonam Gupta

Reserve Bank of India

The Reserve Bank of India follows a multi-layered and continuously evolving forecasting framework to meet its inflation targeting mandate while keeping growth in focus, Deputy Governor Poonam Gupta said.

“Just as the inflation forecasts, the RBI uses a varied set of approaches to generate its growth projections. RBI relies on a balanced synthesis of robust econometric analysis, contemporary economic conditions, and forward-looking sectoral perspectives in preparing its projections,” Gupta said at Pre-release Consultative Workshop on Base Revision of Consumer Price Index (CPI), Gross Domestic Product (GDP) and Index of Industrial Production (IIP) at Mumbai.

Under the flexible inflation targeting (FIT) framework, monetary policy decisions operate with well-recognised transmission lags and impact output and inflation over several quarters, making it essential for policymakers to remain forward-looking, Gupta said.

As a result, the bi-monthly policy resolutions of the Monetary Policy Committee provide projections for inflation and growth up to four quarters ahead, she said. However, Gupta acknowledged that forecasting is inherently prone to errors, particularly during periods of high uncertainty and unforeseen shocks. Inflation forecasting in India, she noted, is further complicated by the high and outdated weight of food in the CPI basket and the volatile nature of food prices.

The RBI also supplements models with expert judgment to better identify turning points, structural breaks, and emerging risks. To improve forecast accuracy, the central bank is recalibrating its models to rely more on recent and relevant data, while also expanding stakeholder consultations, including day-long workshops with professional forecasters.

She added that apart from reducing forecast errors, avoiding any systematic directional bias is equally important, and recent reviews show that the MPC’s inflation and growth forecasts during the inflation-targeting regime have remained unbiased compared with actual outcomes.

On growth projections, Gupta said the RBI relies on a balanced synthesis of econometric modelling, contemporary economic conditions, and forward-looking sectoral assessments.

Projections are derived from a suite of approaches such as the benchmark indicator method, dynamic factor models and short-term time series models, rather than any single framework.

Ahead of every policy meeting, the RBI holds extensive interactions with industry, financial markets, banks, NBFCs, analysts and economists to gather real-time feedback on the outlook. Regular engagement with the National Statistics Office also helps in refining the central bank’s forecasting methods, she said.