New Inflation Forecasting Model Needed
Mumbai: The mid-year Economic Survey has recommended a change in the methodology used to forecast inflation in the country as the factors that drive price movements may be different in a changed marketplace.
Indian inflation may have undergone structural changes that calls for a changed view of the country’s future inflation trajectory and different forecasting models that would capture the changed reality, said the survey penned by chief economic adviser Arvind Subramanian. It said the Reserve Bank of India’s inflation forecast has been at least 100 basis points above actual in the past 14 quarters. One basis point is 0.01 percentage point. Key components like crude oil and food prices that drive India’s consumer prices have seen a dramatic shift in factors driving them and historical context used to explain them are meaningless, it said.
“If there are structural changes in the oil market and in domestic agriculture, inflationary process could also experience structural shifts,” Subramanian wrote. “There are reasons to believe both changes are underway.” The chief economic adviser and the Monetary Policy Committee, which sets interest rates, have been at loggerheads regarding the state of inflationary pressures in the economy. Subramanian has been arguing the time has come for concluding inflation is not a threat anymore in India.
Without directly referring to the need to reduce rates, Subramanian in the survey said inflation has been below the 4% target for eight months. “The current low level of inflation provides a historic moment in inflation scenario, instilling confidence in price stability,” it said.
It has become almost an involuntary reflex to cite geopolitics among risks to oil prices, and hence, to inflation