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Informist, Monday, Nov. 24, 2025

 

NEW DELHI – A Reserve Bank of India paper has laid out a framework to generate short-term inflation forecasts by integrating three diverse procedures — nowcasts, machine learning and statistical methods, and a system of dynamic and stochastic equations. This will allow near-end horizon nowcasts to converge to the benchmark forecasts, the paper said Monday.

 

"The framework is built on seasonally adjusted disaggregated monthly data of 33 sub-groups/components of the CPI-Combined. It employs techniques such as full information matrix, machine learning and statistical models, Bayesian estimation, Kalman filtering and dynamic optimisation to produce point as well as density forecasts of inflation," the paper by RBI staff members Joice John, Saquib Hasan, Renjith Mohan, and Suvendu Sarkar said.

 

Central banks play a vital role by conducting monetary policy to guide economies towards macroeconomic stability and growth, the paper said. "While setting those policies, due to the lags in transmission and other nominal rigidities, monetary policy often focuses on forecasts of the macro variables as intermediate targets. In this context, consistent and reliable forecasts become vital for the conduct of monetary policy," it said.

 

"Using dynamic optimisation, the proposed short-term forecasting model identifies the path that allows convergence from nowcast to benchmark forecast, accentuated or delayed by persistence, spillovers from different inflation components and linkages from other macro variables like output gap, exchange rate and cost conditions," the RBI paper said.

 

The proposed framework offers a forward-looking and granular view of inflation dynamics while enabling scenario analysis, the paper said. "It is also equipped with generating density forecasts. As such, this forecasting framework provides a powerful, yet pragmatic solution for generating short-term inflation forecasts, in an increasingly complex and uncertain environment, which are peculiar characteristics of an emerging market economy," it said.  End

 

Reported by Sagar Sen

Edited by Saji George Titus

 

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