The RBI is under a lot of pressure from all sides to
reduce interest-rates for which it has adopted an inflation targeting framework
for several years. For Jan 2016 the inflation target was set at 6%, and, for
Jan 2017 and Jan 2018 the RBI has set an inflation-target of 5% and 4%, respectively.
The RBI has set a range for inflation for the Indian-economy over the medium
term, 4% with a band of 2% on the either side and a real rate of return of
1.5-2% to the depositors or savers. The RBI before the joining of the current
governor had used the Wholesale-Price-Index (WPI) as the preferred gauge of
inflation which is currently in the negative territory and has been replaced by
the Consumer-Price-Index (CPI) under the new RBI regime.
However, inflation has two more main indices like
Core-WPI or Core-inflation and Core-CPI, i.e. wholesale-prices of manufactured
goods, excluding volatile food and fuel prices, and retail prices of
manufactured goods, excluding volatile food and fuel prices, respectively.
There is always a question or argument among the economists regarding the
appropriate index for inflation. Different countries use different indices of
inflation as per the requirements for interest-rate decisions. Nevertheless, it
is entirely possible that some indices may show higher inflation compared to
the other indices.
For example, in INDIA the WPI is negative at -0.91%,
but the CPI is at 5.19% and Core-inflation and Core-CPI are around 2-3%.
Therefore, if we take into account only CPI there is not much room for rate-cut
after making provisions for a real-rate-of-return of 1.5-2%, but if we take
into consideration the WPI there is a lot of space for monetary accommodation.
The same is true for Core-inflation and Core-CPI below at 3%. Out of the four
indices three do not show high inflation.
Nonetheless, the debate between economists for the
right index of inflation is not over yet and if we take the CPI as the only
index there is not much possibility for rate reductions.
Notwithstanding, our Chief-Economic-Advisor has been
vocal about the problems of using WPI or CPI for the computing gross-domestic-product
(GDP) which could also be generalized to the other two more indices – Core-inflation
and Core-CPI. The problem is, if we use only WPI or CPI or Core-WPI or Core-CPI
as GDP-deflator it would not look consistent with the true perception of
inflation – producers and consumers, both. Too low or two high index for
inflation might retard the methodology used for GDP and inflation calculation.
The method of figuring-out the mean or the average of
all the inflation-indices to find-out GDP-deflator and inflation might seem
more credible form the point of view of analysis. The mean of the combined
inflation-index comprised of all the four main indices may truly reflect the
general-price-level and the general perception about it.
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