Forecasting is big business, wrapped in the garb of data and analysis. We are constantly bombarded with projections, be it for stock prices, economic growth, or even natural disasters. But as Morgan Housel writes, forecasts are essentially stories we tell ourselves, narratives spun from today’s figures to paint a picture of tomorrow.

The Storytelling of Forecasts

Markets, however, thrive on the belief in a tomorrow. This future needs to be reasonably defined, shaped into a rational narrative. Policymaking, too, leans heavily on these projections. Without them, fiscal and monetary policies would be rudderless. The market’s faith in forecasts is, therefore, somewhat understandable. But the danger arises when forecasters, and indeed, we ourselves, forget that these estimates are just that – stories. They may appear as hard numbers, backed by data, yet much of their substance is subjective opinion. This subjective element is what separates plausible forecasts from outlandish ones. We saw this play out with the Reserve Bank of India’s (RBI) inflation projections during the pandemic years of 2020-22, tripped up by unforeseen global events.

RBI’s Firm Hand on Lenders

Speaking of reality checks, the RBI recently cancelled the registration of Margdarshak Financial Services Ltd, a non-banking financial company (NBFC), citing alarmingly high net non-performing assets (NPAs) and defaults. This action underscores the central bank’s stringent regulatory oversight and its commitment to maintaining financial stability. Margdarshak’s failure to meet minimum capital requirements and its struggle with cash flow issues, as highlighted in its statutory audit, paint a concerning picture of risk management lapses within parts of the NBFC sector. The RBI also imposed penalties on NDX P2P Pvt Ltd and Innofin Solutions Pvt Ltd for non-compliance with digital lending guidelines, further reinforcing its intent to keep a tight leash on the rapidly evolving digital finance landscape.

These events serve as a potent reminder that while projections and forecasts are essential for navigating the future, they are not gospel. The recent market valuations, as Kotak Institutional Equities has pointed out, might be getting ahead of themselves, fuelled by optimistic projections of India’s economic ascent – from a $5 trillion economy to a $50 trillion behemoth by 2050. While aspiration is vital, grounding these ambitions in realistic assessments and robust risk management is equally critical.

Are we in danger of being swayed too much by the stories of tomorrow, forgetting the realities of today? Prudent investors and policymakers would do well to remember Housel’s words: “A fact multiplied by a story always equals something less than a fact.” Perhaps a dose of scepticism and a sharper focus on present-day financial health, like the RBI is advocating, is what the markets truly need right now.