Abstract
This study attempts to evaluate the monetary policy of the Reserve Bank of India (RBI) based on an investigation of the policy statements. The analysis based on text mining of the central bank’s monetary policy statements seeks to unravel the information considered by the central bank and the processes followed in making its inflation forecasts. The findings indicate that although the RBI examined high-frequency economic indicators, its inflation forecasts have generally been off the mark. Specifically, the monetary policy committee failed to foresee the sharp disinflation that followed the demonetization announced on November 8, 2016. This failure resulted in a high real interest rate regime that dealt a blow to the economy staggering under the effects of demonetization. Our research findings show that the monetary policy governance practices need to be refined and better aligned to economic realities, particularly under the RBI’s new monetary policy framework.
Highlights
Policy statements by central banks provide a source of unstructured yet rich and largely untapped information that plays out in subsequent effects on the economy
While the actual inflation index has a variance of 0.36, the sentiment index is far more conservative, 0.16. This indicates that the monetary policy committee (MPC) has been conservative in its monetary policy pronouncements, and it has been unable to foresee sharp swings
This article demonstrates that analysis of qualitative data could unveil critical information that is often lost in verbiage and overlooked
Summary
Policy statements by central banks provide a source of unstructured yet rich and largely untapped information that plays out in subsequent effects on the economy. Authors like Stojanovikj and Petrevski (2020), Lin and Ye (2009), and Batini and Laxton (2007) noted that IT has helped in lowering average inflation in emerging markets that have shown the willingness of price control despite having fragile institutional capabilities Keeping these findings and the Indian macroeconomic reality discussed earlier in mind, this article endeavors to analyze and understand the performance of the RBI’s inflation forecasting under the IT regime. A corpus of monetary policy statements of the RBI are used to investigate and contextualize the factors considered and deliberated by the MPC while making these predictions This further serves as a basis for evaluating the performance of the central bank in terms of inflation forecasting. This article concludes with some highlight discussions and conclusions
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