Given RBI Governor Raghuram Rajan’s recent statements, market players are betting on him shifting to using the CPI as the variable to track, in much the same way it is by other central banks. There are many reasons to do so, the most important one being that households look at consumer price inflation and so, in the context of wage-negotiations for instance, it is the high CPI that determines what happen. Sure, WPI and CPI measure two different things, and at different parts of the delivery chain, but they have to move in parallel eventually. The problem in India, however, is that you will have two entirely different set of monetary policies depending on whether you use the WPI or the CPI. While core-WPI has been falling in keeping with the overall slowing of the economy, core CPI has shown a stubborn persistence. It is true WPI measures prices at the wholesale level and CPI at the retail level, but retail margins haven’t shot up so as to be able to explain this. Similarly, while CPI captures services unlike WPI, it is difficult to see how services inflation could have increased so dramatically especially in the face of a steady fall in services growth.
Our columnist Renu Kohli has, both today as well as earlier, raised some important questions about the quality of data. Why should the CPI series for rural and urban inflation converge when both the rates of inflation as well as the weights of various commodity baskets are so completely different in rural and urban areas? Intriguingly, this convergence in inflation trends applies to the sub-components of CPI inflation as well; it is difficult to understand, similarly, why ‘bedding and clothing’ inflation in core-CPI should be rising on average 15% since January 2012. Perhaps why former RBI Governor D Subbarao, while talking as late as August 30, pointed out that the new CPI had just 19 data points which was nowhere near sufficient for it to be used as a variable to decide policy. If RBI plans to switch to the CPI, it needs to address these issues and provide an explanation as to why CPI and WPI are diverging so dramatically—perhaps the Urjit Patel panel on the ‘monetary policy framework’ will provide a fuller explanation.