How postmen, and their wives, may help set India's monetary policy

Jan 28 2014, 16:41 IST
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Global investors may well be putting their faith in postmen like Phanin Deka when they decide to buy or sell Indian assets in the future. Reuters Global investors may well be putting their faith in postmen like Phanin Deka when they decide to buy or sell Indian assets in the future. Reuters
SummaryGlobal investors may put their faith in postmen when they decide to buy or sell Indian assets.

Global investors may well be putting their faith in postmen like Phanin Deka when they decide to buy or sell Indian assets in the future.

He is one of about a thousand post workers collecting data that determines the level of India's consumer price index, which is likely to become the central bank's most important tool for setting monetary policy.

Deka, a postmaster in Sarpara in the northeastern Indian state of Assam, spends 6 days every month visiting two villages by bicycle to collect prices from 15 shops.

"At times, some shopkeepers refuse to co-operate. I think they consider me as an irritant, particularly when customers are around," said Deka.

Last week, a committee formed by Reserve Bank of India (RBI) Governor Raghuram Rajan proposed making CPI the central bank's main inflation measure and using it to set an inflation target, part of sweeping proposals to revamp monetary policy in a country that has long struggled with high inflation.

It would make CPI the most important data followed by the central bank and key in determining changes in interest rates that could affect millions of dollars in investments and loans.

For years, India has been an outlier among major economies by relying as its main inflation gauge on changes in wholesale prices, collected from India's cities. That was because the CPI was seen as too heavily geared to food prices, which are unresponsive to the ups and downs of interest rates because people have to eat.

On Tuesday, the RBI unexpectedly raised its policy interest rate by 25 basis points to 8 percent, citing its intent to bring consumer inflation down in line with the path spelled out by the panel, an indication it will adopt those recommendations.

Rajan said the RBI would discuss the panel report with the government before proceeding on its proposals, but said retail investors and consumers look at CPI inflation for guidance.

"Over time we have to figure out how we make the index better," Rajan said.

"But the fact that the index is not perfect does not say that there is no problem. CPI inflation is too high."

There is a wide gap between wholesale and consumer inflation in India, so if the new set up is approved, economists expect higher interest rates for longer. In December, WPI inflation in Asia's third-largest economy was 6.16 percent and CPI was nearly 10 percent.

Using CPI as a benchmark eventually to bring inflation down to a targeted 4

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