New In­fla­tion Fore­cast­ing Model Needed

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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

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