Assessing Central Bank Commitment to Inflation Targeting: Evidence From Financial Market Expectations in India

We do this by combining the two measures into one single measure that we call “combined inflation”—we set this measure equal to the WPI inflation forecast in the pre-September-2013 period and the CPI inflation forecast in the post-September-2013 period, in keeping with the change in the RBI’s policy. [...] The OIS analysis requires that the horizon of the forecast for the interest rate on the left-hand side of the monetary policy reaction function is the same as the horizon for the forecasts of the macroeconomic indicators on its the right-hand side. [...] The top rows show the estimates for the pre-FIT sample, and the bottom rows show the estimates for the post-FIT sample. [...] To easily compare INR/USD exchange rate forecasts with inflation and output growth forecasts, we calculate the percentage change in the exchange rate according to the following formula: (ERt+h − ERt) ∗ 100, (12) ERt where ERt is the exchange rate on the day of the Consensus survey (included in the Consensus data set), and ERt+h is the exchange rate forecast that is closest to the forecast horizon. [...] We believe that a better comparison for testing the reliability of the forecasts would be to compute the actual counterpart of the variable for which the forecasts are made and then test whether the forecasts become closer to these alternative actual values as the end of the fiscal year nears.