RBI policy review: High retail prices may deter softening of interest rates
Today, growth continues to remain a challenge. The RBI has lowered its
gross domestic product (GDP) forecast for 2012/13 to 5.7 per cent from
the earlier projection of 6.5 per cent. Global bank HSBC has lowered its GDP growth estimate to 5.2 per cent
from 5.7 per cent. Clearly, there is room for the RBI to reduce the
repo rate by 25 to 50 basis points from eight per cent to support growth
at this juncture.
However, there is a new variable that could hinder a softening of interest rates in 2013. And that variable is the Consumer Price Index (CPI ), which is an indicator of retail inflation.
The Wholesale Price Index (WPI ) is usually the main indicator for the Reserve Bank of India (RBI) for while taking a decision on interest rates. The WPI had softened to 7.18 per cent by December 2012.
However, the CPI was still in double digits in December, at 10.56 per cent.
While the WPI is computed on an all-India basis, the CPI is constructed for specific segments. Today, there are actually three different CPIs covering different segments of the population: urban, rural, and a combination of both.
The WPI is no longer sticky and actually fell to 7.18 per cent from 7.50 per cent in October last year. But the WPI has a broader coverage than the CPI in terms of the number of commodities, quotations, non-agricultural products and tradable items.
In the past, the RBI has often been criticised for using the WPI as the headline inflation index. Many economists and experts believe that it fails to capture the real prices of goods in the neighbourhood market, such as, say, of onions or potatoes. They suggest that the CPI is the correct indicator, as it reflects ground realities.
However, there is a new variable that could hinder a softening of interest rates in 2013. And that variable is the Consumer Price Index (CPI ), which is an indicator of retail inflation.
The Wholesale Price Index (WPI ) is usually the main indicator for the Reserve Bank of India (RBI) for while taking a decision on interest rates. The WPI had softened to 7.18 per cent by December 2012.
However, the CPI was still in double digits in December, at 10.56 per cent.
While the WPI is computed on an all-India basis, the CPI is constructed for specific segments. Today, there are actually three different CPIs covering different segments of the population: urban, rural, and a combination of both.
The WPI is no longer sticky and actually fell to 7.18 per cent from 7.50 per cent in October last year. But the WPI has a broader coverage than the CPI in terms of the number of commodities, quotations, non-agricultural products and tradable items.
In the past, the RBI has often been criticised for using the WPI as the headline inflation index. Many economists and experts believe that it fails to capture the real prices of goods in the neighbourhood market, such as, say, of onions or potatoes. They suggest that the CPI is the correct indicator, as it reflects ground realities.
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