Evaluation of the Inflation Forecasting Process of the Reserve Bank of India: A Text Analysis Approach

Abstract

<div><div><div><p>This study is an attempt to evaluate and interpret the monetary policy statements (MPS) of the Reserve Bank of India (RBI) for the five year period since it started conducting monetary policy meetings every alter- nate month. An important contribution of this paper is the evaluation of the inflation forecasting path of the RBI using information from the state- ments. Both qualitative and quantitative methodology has been adopted to study and evaluate the MPS. It helps in understanding processes fol- lowed and information considered while making inflation forecasts. The results clearly indicate that though the RBI examined the high frequency economic indicators in their process of assessment and inflation forecast- ing, their inflation forecasts have been below the mark. Similarly, the monetary policy committee (MPC) could not predict the sharp disinfla- tion following demonetization on 8th November, 2016 resulting in higher real interest rate regime. This shows that the monetary policy governance under the new monetary policy framework of the RBI needs to be revisited to align it with the economic reality of India.</p></div></div></div>