The central bank’s inflation loss in the first three months of the year was 0.7 percentage point – the biggest difference in almost six years, and well above economists’ expectations. | Photo credit: FRANCIS MASCARENHAS
The central bank’s inflation loss in the first three months of the year was 0.7 percentage point – the biggest difference in almost six years, and well above economists’ expectations. The estimates for the following two quarters were also off, with smaller margins of 0.2 points and 0.1 points respectively.
Economists are predicting another big miss in the current quarter, after surprisingly low inflation in October. This means that the RBI’s projection of 2.6 per cent for the fiscal year to March, which was recently released in October, already appears outdated. Economist Tanvee Gupta Jain of UBS Group AG expects inflation during this period to be between 2 percent and 2.2 percent, an all-time low.
The result is that the RBI has probably been more aggressive than necessary, economists say, and has been reluctant to cut interest rates even as the economy likely needed a boost after US President Donald Trump imposed 50 percent tariffs on Indian goods.
In June, Governor Sanjay Malhotra delivered a bigger-than-expected rate cut of 50 basis points but shifted the policy stance to neutral, a relatively aggressive move that indicated a more limited scope to cut rates further. The RBI has kept interest rates unchanged since then despite the slowdown in inflation.
Sonal Varma, an economist at Nomura Holdings Ltd, said central banks tend to be conservative in their forecasts and forecasts often “anchor policy intentions” rather than pure predictions.
The risk, however, is that when inflation consistently falls below expectations, inflation-adjusted interest rates “end up being much higher than intended, and monetary policy becomes unintentionally restrictive,” she said. “Repeated misses can also damage the credibility of the policy.”
The main reason why the RBI and economists have got inflation forecasts so wrong this year is because of the sharp fall in food prices. Harvests have been strong following a favorable monsoon season, while improvements in supply chain management have helped reduce costs. Food makes up 46 percent of the consumer price index, meaning it has an outsized influence on inflation outcomes. In October, food prices fell by 5.02 percent compared to a year earlier.
“Inflation forecasts have been wrong for everyone this year, but what matters is that policy adjusts to actual outcomes and new information,” said A. Prasanna, chief economist at ICICI Securities Primary Dealership Ltd. He expects the RBI to cut interest rates by a quarter of a point for the last time this year in December.
At the August monetary policy meeting, Malhotra said food price volatility had pushed headline inflation up by as much as 3 percentage points on average over the past eight to nine years. He noted that core inflation, which excludes volatile food and fuel components, has risen only slightly.
The RBI updated its inflation forecasting framework in 2023, called the Quarterly Projection Model 2.0, which includes more detailed models of fiscal-monetary interactions, domestic fuel prices, capital flows, exchange rates and central bank interventions.
The model is now being further refined with new data to “improve nowcasting and forecasting of key macroeconomic variables and develop more robust models,” Malhotra said in a press conference after the first policy meeting he chaired in February.
Another reason for the overestimation of inflation could be an outdated consumer price package that has not been revised for more than a decade. India’s Ministry of Statistics and Program Implementation will release an updated gauge early next year, which will help mitigate some of the forecast errors.
Similar forecast errors have also been observed in economic growth estimates. Gross domestic product grew 5.4 percent in the July-September quarter of 2024, compared to the RBI’s 7 percent projection, marking one of the biggest forecast errors in recent years. In the April-June quarter of this fiscal, GDP grew 7.8 percent, well above the central bank’s estimate of 6.5 percent.
The RBI’s latest forecast – published last month – projects inflation to average 1.8 percent this quarter, almost double the pace forecast by economists such as Kaushik Das of Deutsche Bank AG, who expect inflation of 0.7 percent. Inflation is then expected to gradually accelerate next year to around 4.5 per cent in April-June, said the RBI, which is likely to revise its forecasts in December.
Soumya Kanti Ghosh, chief economic adviser at the State Bank of India Group and member of the Prime Minister’s Economic Advisory Council, said that with inflation remaining soft, the RBI likely missed an opportunity to take pre-emptive action in August and October.
“As predicting inflation on a monthly basis remains a difficult task, the boldness of long-term forecasts can only weaken the central bank’s communication with market forces,” he said.
More stories like this are available at bloomberg.com
Published on November 19, 2025
#RBIs #big #inflation #errors #put #Indian #forecasts #scrutiny