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| RBI study doubts efficacy of price data for monetary policy |
| Press Trust of India / Mumbai Sep 02, 2010, 21:46 IST |
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 Even as the Reserve Bank of India (RBI) has been tightening monetary policy to attack inflation, a study by the central bank says various measurements of the rate of price rise in India make it difficult to frame policies, as all of them are volatile in nature.
"In the Indian context, the alternative measures of inflation, such as month-over-month seasonally adjusted inflation and core inflation, do not exhibit the desirable properties for becoming the key reference indicators in monetary policy, as they are significantly volatile, like the headline inflation," the study by the central bank said.
However, the new proposed consumer price index (CPI), which is expected to come into effect in January next year, is expected to eliminate some of the shortcomings in measuring the rate of inflation, according to the study, titled, 'Measurement of Inflation in India, Issues and Associated Challenges for the Conduct of Monetary Policy'.
"Recent initiatives on improving price statistics in India, especially in terms of generating data on CPI-Urban and CPI-Rural and a representative CPI for the country as a whole over time, would address a major data gap in India," it said.
CPI is a measure estimating the average price of consumer goods and services purchased by households and measures the price change for a constant market basket of goods and services from one period to the next within the same area like a city, region, or country.
Currently, there are four CPI inflation indexes -- the CPI for industrial workers, CPI for agricultural labourers, CPI for rural labourers and CPI for urban non-manual employees. This will be changed with the new index.
The study said that discrepancies in proper inflation measurement could lead to complications in policy making.
"Limitations of the data on prices could yield misleading empirical estimates generated from analysis of money demand, monetary policy transmission, policy reaction function, pass-through effects and the real effective exchange rate. All these are important for the conduct of monetary and macro- economic policies," it added.
The study comes at a time when the RBI has been hiking short-term lending and borrowing rates and squeezing money supply through other tools this year to contain inflationary pressure.
Food inflation continues to be in double digits and was pegged at 10.05 per cent for the week ended August 14. Overall inflation came down to a single digit at 9.97 per cent for the month of July after being in double digits for five consecutive months.
All consumer price-based inflation numbers are in double digits.
Experts expect the RBI to further tighten the money supply at its upcoming mid-quarterly review on September 16.
The RBI study said that statistical limitations have come into focus frequently in recent times.
"This is because of the large divergence between CPI and wholesale price index (WPI) inflation trends in the past, wide dispersion in inflation across commodity groups within WPI, weak representative nature of the price indices in relation to the size and structure of the economy and significant volatility in headline WPI inflation due to supply shocks," it said.
The government had planned to introduce the new system of inflation measurement from August. It was, however, postponed and official sources said it is now likely to be come only in October as the government tries to up some "loose ends" to include about 250 extra items, like LCD TVs, in sync with modern times.
In the new wholesale price-based index for measuring inflation -- with 2004-05 as the base year -- the number of commodities will go up to about 680.
The new WPI is likely to include a host of new products like LCD TV sets and other electronic products. However, mobile phones and laptops may not find a place in the new index as their prices change very fast and models also get obsolete fast.
"Since the distribution of inflation across different commodities within WPI exhibits large changes during periods of supply shocks, understanding the variability within the commodity basket is critical for analysing the underlying price pressures and respond with appropriate policy action," the RBI study said.
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