The new Wholesale Price Index (WPI), seen as much wider and relevant, may present one more dilemma to the Reserve Bank of India (RBI) when it announces the mid-quarter review of monetary policy – also a first of its kind exercise – tomorrow.
Economists have already started to lower their inflation projection based on the new base of the Wholesale Price Index (WPI).
Headline inflation decelerated to 8.5 per cent in August compared to 9.8 per cent in the previous month, mainly due to the revised WPI base. The base year for WPI is now 2004-05, not the earlier 1993-94.
The base revision for WPI is usually done once in every 10 years. This is the fifth such revision. Revisions of base entail a shift of the reference year, change in basket of commodities and assigning new weights to commodities.
Economists were quick to react to the new base and altered their estimates for inflation. For instance, HDFC Bank’s chief economist, Abheek Barua, is now forecasting inflation of 5.5 per cent in December, compared to the 6.5-6.8 per cent projected earlier. For March-end, he has lowered his forecast by a percentage point to five per cent.
Similarly, Citi India economists Rohini Malkani and Anushka Shah lowered their expectations of average 2010-11 inflation to 7.9 per cent from the earlier projection of 8.8 per cent. The economists also said inflation would moderate due to favourable monsoon and the base effect.
Guess game
Will RBI Governor D Subbarao and his team take this new base into account and lower inflation projection for March 2011? RBI had raised its projection for WPI inflation for March 2011 to six per cent in its first quarter review in July from the April policy projection of 5.5 per cent.
According to A Prasanna, vice-president at ICICI Securities Primary Dealership, since the contribution of non-food items seems to be stabilising in both the old and the new series, it should have a bearing on RBI thinking about monetary policy.
“We had argued that RBI is close to calling a temporary halt in its normalisation campaign. We stick to that call and maintain that RBI will halt its normalisation for a period of at least four months after hiking policy rates by 25 bps each in the September policy. We look for RBI to take note of the lower manufacturing and core inflation in tomorrow’s statement,” he said.
Standard Chartered Bank’s chief economist, Samiran Chakrabarty, who thinks the new WPI series is unlikely to be a game changer, argues that with growth numbers surprising on the upside, the RBI is likely to remain focused on tackling inflation.
“Headline inflation, calculated either using the old or the new series, is still very high. This is likely to prompt the RBI to raise both the repo and the reverse repo rates by 25 bps each,” he said.
The other question being asked is on the central bank’s tolerance level on inflation and if it will also change with the advent of the new series.
“If there is a change in RBI’s projection of the inflation trajectory, then it could possibly pause in Q3-FY11 and the likelihood of a rate hike in Q4-FY11 would be substantially reduced,” said Chakrabarty.
