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Share"The currently observed negative WPI inflation largely reflects the statistical effect of the high base of last year and should not be interpreted as structural deflation arising from demand contraction"
--RBI's first quarter review
If the first quarter review of the monetary policy is reckoned as a non-event, think again.
From "around" 6% spurt in real gross domestic product during the current fiscal year, envisaged in the annual credit policy statement in April last, to 6% "with an upward bias" in the first quarter review, the Reserve Bank of India (RBI) has become somewhat more optimistic on the macro-economic front.
Again, it has now loosened the monetary strings somewhat by projecting an 18% growth in broad money from the earlier 17% and has signalled banks to be more forthcoming on lending by saying that scope exists for more cuts, despite the fact that status quo has been maintained on key policy rates and reserve ratios.
More importantly, the central bank has sought to downplay inflation rates slipping into negative territory by averring that a reversal of this trend may occur as early as October 2009 when the base effect -- that is, the sharp increases in prices during the first half of 2008-09 -- may be over and, thereafter, wholesale price inflation rates may creep up "even without any major supply shock".
It further notes that there are signs of inflationary pressures building up; the sequential inflation rate has risen by 3.5% between end-March 2009 and early July. The monsoon thus far has struck a discordant note.
Yet, the RBI clings to the view that, the headline inflation rate may be contained to 5% during this year; though this represents a more realistic assessment compared with the figure of 4% in the April policy stance, it would appear that this reading of the price situation may be wishful thinking.
It observes that the "delayed monsoon has increased the downside risks to agricultural production" and notes elsewhere in the quarterly review that, good agricultural production holds the key to stability in food prices.
In a year characterised by good monsoon, that is 2008-09 and when farm harvest was also good, food prices maintained by a relentless upward spiral -- with the food group in the consumer price index for working class hardening by 11.7% as of May 2009, in the index for urban non-manual employees by 12.9% in May 2009, in the index for agricultural labourers and rural labourers by 12.4% each in June 2009 and, even in the wholesale price index by more than 8%, how can we hope for the food prices -- and hence the overall inflation rate -- to be subdued this year when the situation on the kharif front is a matter of concern and prices are on the upswing abroad too.
In a word, containment of headline inflation rate to 5% by end-March 2010 appears to be a tall order.
There is also another aspect to this obsession with the wholesale price index in regard to inflation targeting.
RBI states in its latest review that, for its assessment of inflation outlook for policy purposes, it monitors the full array of price indicators. If this is so, this is not reflected in the policy pronouncement where, though a discussion of various measures of inflation finds a place, the focus is on the WPI-based inflation.
RBI admits tha the divergence between the WPI and CPI inflation rates become (sic) more pronounced in the recent period with the WPI inflation turning negative, while the CPI inflation is ruling in the range of 8.6% -- 11.5%.
Instead of CPI tracking WPI with a time lag, as in the past, now, the CPI remains at a elevated level due to increase in food prices which have a higher weightage in the CPI than in the WPI.
But, the price behaviour where it matters most -- at the consumer level -- seems to be have been lost sight of and when it comes to pegging the interest rates, the headline inflation numbers calculated on the wholesale index seem to hold sway.
