RBI may use robust statistics, ML for real time economy tracking, say officials

Due to its timely availability, WAI holds the potential to bridge the information gap in the monthly high frequency indicators – a crucial input for monetary policy deliberations

The Reserve Bank of India (RBI), going forward, would to deploy robust statistical data and machine learning (ML) techniques to strengthen real-time tracking of economic activity in a bid to effectively deal with the impact caused by the pandemic, RBI officials wrote in an article published in the latest edition of RBI Bulletin. 

The RBI has recently come out with weekly-activity indices to track the latest developments in the Indian economy with the least possible lag. 

Two different weekly indices have been developed using daily/weekly indicators – a 7-indicator weekly activity index (WAI) using the dynamic factor model reflecting changes in economic activity on a year- on-year basis; and a 15-indicator weekly diffusion index (WDI) reflecting directional movement on a sequential basis which complements the model-based WAI. 

Highlighting the importance of these real-time monitoring systems of the Indian economy, RBI officials said, “Outbreak of the COVID-19 pandemic has called for prompt policy actions to safeguard livelihoods and make timely assessment of the economy to help in speedy recovery.” 

“With faster innovation and realignment of production processes due to the pandemic, the extant economic indicators fell short of keeping pace with rapid changes in the economy. This called for supplementing them with additional data, preferably with lower time lag,” they said.

For the central banks, timely information on economic activity was crucial, particularly for exercising precise judgement in the monetary policy decisions. During each round of the monetary policy of the RBI, available information set for decision-making was found to be highly asynchronous, they said. 

Stating that WDI presents sequential movement in activity to present an aggregate picture on the direction of trend movement, they said these indices, apart from providing the weekly trajectory for the selected set of economic variables, also act as a robust indicator of the quarterly GDP.