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RBI Finally Admits the Importance of Consumer Price Inflation


The RBI has always concentrated on Wholesale Price Index (WPI) based inflation. As I’ve noted, there is a huge difference between inflation in wholesale prices and retail (consumer) prices. The RBI has now come around to explicitly stating this view:

Sustainable recovery requires control over consumer price inflation

VII.3 India’s consumer price inflation has been hovering around the double digits for 15 consecutive months. Such high inflation is a source of internal and external disequilibrium. It causes real consumption demand to fall along with lowering of household savings that provide the bulk of financial surpluses to support private and public investments. High consumer price inflation does not help public finances either as it puts pressure for larger fiscal subsidies. As domestic savings get eroded, it widens the external gap reflected in the CAD. High inflation also means large inflation differential vis-à-vis global trading partners which then makes the economy vulnerable to currency pressures. India’s current macroeconomic deterioration to a large extent, reflects the three years of high inflation, which is well above the threshold at which it turns detrimental to growth. While the fall in headline WPI inflation affords some comfort, it is important to bring consumer price inflation under control.

VII.4 Going forward, inflation risks remain. The recent rupee depreciation of about 9 per cent in Q1 of 2013-14 is likely to put some fresh pressure on domestic inflation as pass-through occurs. Fuel under-recoveries have risen sharply due to the exchange rate depreciation and domestic price rigidities. Given the wide CAD, it is important to keep fiscal deficits under check. Therefore, it is necessary to pass on increases and adjust administered prices in the energy sector, including coal and electricity. However, in the short-run it poses challenges for inflation management.

(Emphasis Mine)

What RBI is saying, is that high consumer inflation:

  • Reduces consumption demand (in real terms, i.e. net of inflation)
  • Reduces domestic savings which reflects effectively in the Current Account (I don’t get the second part, but yeah, okay)
  • Creates an inflation differential between other trading partners so the rupee is hit
  • sustained high inflation (we’re already three years in) hurts growth
  • Rupee depreciation will surely cause more inflation soon especially if costs aren’t passed on like in fuel prices.

Data wise: Compounded growth for Workers on the CPI front has been over 10% for all CPI Measures (there are four)

CPI Inflation – with the most reliable CPI measure, the MOSPI one – is at 9.87% for Jun 2013. For the same month, WPI inflation is just 4.86%. This makes little sense and CPI should be the one used.

Further, inflation expectations remain high.

Inflation Expectations

In my opinion, this means just one thing: No rate cut tomorrow. Possibly a CRR hike, but recent measures have already cut off liquidity and will show their impact in a week or so. I expect the status quo to prevail; markets seem to think so as well.


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