Flawed forecasts

Poor quality of data hampers policymakers in their decision-making. This hurts outcomes

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FORMER RESERVE BANK of India (RBI) Governor YV Reddy is believed to have remarked that while the future is uncertain everywhere, in India even the past is uncertain. That quip captures the dilemma of RBI governors who must frame monetary policy using data that, as another former Governor Duvvuri Subbarao noted, can be "analytically bewildering". Poor data quality and long reporting lags have long undermined efforts to forecast inflation or GDP. The frequent and significant revisions to India's economic data also make its historical figures as uncertain as the future projections. The RBI's recent overestimation of inflation has once again spotlighted the limitations of its models. The variance for the March quarter was a sizeable 0.7 percentage points-possibly the largest in years-though the deviations for the next two quarters were much smaller at 0.2 and 0.1 points. Even so, the December quarter projection could also overshoot the actual print, forcing a rethink of the 2.6% inflation forecast for FY26.Such revisions are unwelcome, given that corporates use inflation projections to set pricing strategies.