Mumbai, Sept. 22: A section of economists believe the RBI is beginning to give more importance to consumer price index (CPI) than the wholesale price index (WPI). New RBI governor Raghuram Rajan had raised the repo rate — or the rate at which the apex bank lends to banks — to 7.50 per cent, stunning markets and industry.
Usually, the RBI closely tracks the WPI numbers before taking policy actions, but indications seem to be otherwise.
The RBI maintains that it takes into consideration both WPI and CPI data. “The RBI has always looked at both CPI and WPI. We have to take everything into account. WPI does not contain significant portion of services inflation. One particular inflation reading does not affect our stance,” Rajan had said after announcing the monetary policy.
In its mid-quarter policy review, the RBI said the repo rate was raised because WPI had started to increase again on account of fuel price hikes. It said the inflationary impact of this development had been compounded by the sharp depreciation of the rupee and rising international commodity prices.
The apex bank added that high CPI had raised inflation expectations, which eroded business and consumer confidence, mirroring Rajan’s view that it considers both the indices.
However, economists such as Sonal Varma of Nomura have a different view. “The policy marks a regime shift in the RBI’s operating framework. Without explicitly saying so, the RBI appears to be moving towards an inflation targeting regime (placing a greater weight on CPI-based inflation measures),” she said in a note.
Varma added that though the RBI was vague about its new nominal anchor, as a committee under deputy governor Urjit Patel was deliberating on this matter, WPI inflation measures were becoming secondary as more weightage was being given to CPI, which is at 9.5 per cent.
“The RBI is assigning a greater relative weight to CPI and core CPI inflation (8.2 per cent) as it believes that inflation expectations are shaped by the latter. In particular, we believe that core CPI inflation has a greater probability of becoming the new medium-term nominal anchor. This new monetary policy framework suggests that real rates are low (repo rate is below the neutral rate) and need to rise gradually. The repo rate hike may be the first step in this direction,” she said.
Nomura is of the view that the RBI will hike repo rate by 50 basis points to 8 per cent this fiscal followed by a prolonged pause. Rate cuts will only follow decline in inflation expectations.
A senior official, who is in the asset-liability committee of a public sector lender here, said while it was right to say that the apex bank had been giving more priority to WPI, the importance to CPI had also gone up.