C Rangarajan Chairman, Prime Ministers’ Economic Advisory Council (PMEAC) today said that if both the wholesale price index (WPI) and consumer price index inflation continue their downward journey, then Reserve Bank of India will have some room for easing in upcoming monetary policy.
Rangarajan said that April WPI inflation which came at 4.89 percent, lower than 5.96 percent in March was a reassuring sign that inflation was moving towards comfort zone.
“The wholesale price inflation has moved to the comfort zone and what is interesting to see is that all the segments whether it is a primary articles or fuel and power or manufactured products, all of them have shown a tendency to decline,” he said.
Montek Singh Ahluwalia, Deputy Chairman Of Planning Commission also believes that inflation is softening. "I expected that in the coming months inflation would be around about 5 percent... If it comes to around 5 percent then basically it is what we normally regard as an acceptable level although obviously you want to make sure that food prices etc are as controlled as possible," he said.
Rangarajan however raised concern about the wide gap between WPI and retail inflation. India’s consumer price inflation or retail inflation slowed to 9.39 percent in April from 10.39 percent in March. “Certainly, we need to now look at why the CPI inflation and WPI inflation are standing at such different levels. Even though the trend has been in the same direction, there has been a decline in CPI inflation also in April,” he pointed.
Below is the verbatim transcript of Rangarajan's interview on CNBC-TV18.
Q: This is a huge surprise, 4.89 percent and core inflation is coming in at 2.8 percent, what does this tell you of the trajectory, do you see inflation getting now to 4 percent by September?
A: That is very difficult to predict but certainly, the wholesale price inflation has moved to the comfort zone and what is interesting to see is that all the segments whether it is a primary articles or fuel and power or manufactured products, all of them have shown a tendency to decline. That is a welcome sign. As far as the future is concerned, some adjustments will have to be made on the fuel side and much will depend upon the monsoon as far as the food inflation is concerned. However, whatever we have seen this month is highly reassuring.
Q: There is still a conundrum for the Reserve Bank of India (RBI), isn’t there? While consumer price index (CPI) number has come in lower than estimated and a fairly good 1 percentage point fall in April from March, it is still at 9.4 percent. As well yesterday’s trade deficit numbers were deeply distressing at USD 17.8 billion. Where does this leave monetary policy?
A: It is a difficult decision to make at this point but we can watch and see for one more month to see whether what is happening to the inflation. If inflation persists in the direction in which it has been moving then it certainly gives more space to monetary policy. Certainly, we need to now look at why the CPI inflation and wholesale price index (WPI) inflation are standing at such different levels. Even though the trend has been in the same direction, there has been a decline in CPI inflation also in April. It is way above what we have seen with the WPI inflation. Some analysis will have to be done now to find out why there is such a wide divergence between WPI and CPI.
Q: Isn’t it quite clear that the CPI inflation has a lot of services – I am only referring to the core CPI and the core WPI? The core CPI is still standing at 8.1 percent and there is a large component of services as well as housing in that basket, which is not there in WPI, wouldn’t that be disturbing if that core inflation of services and housing is at 8.1 percent?
A: The word core inflation has different meanings for WPI and CPI. Therefore, the core CPI inflation is not identical with WPI inflation. As you said, yes, the core CPI inflation includes not only what is contained in the core WPI inflation but also several other services. We need to understand whether the prices of those services are increasing at a much faster rate.
I think why commodity by commodity analysis of what is happening at the WPI level and what is happening at the CPI level is required. So far, one has been seeing the two moving in the same direction. There was some difference in the level but now there is a substantial difference in the WPI and CPI, which requires a little more examination.
Q: The CPI both core and overall are still at elevated levels, you would think that the Reserve Bank of India will have to pay a lot of attention to their current levels?
A: We need to look at a number of indicators. Our CPI inflation is one indicator. But I think we need to wait for one more month for the data to come in and that will clear to some extent the reasons why there is a divergence but the quick analysis of the reason for the divergence will help in decision making.
Q: What are your thoughts on the revision in the month of February for WPI inflation, all the way to 7.3 percent because even January was revised higher to 7.3 percent as well so we are pretty much averaging 7.3 percent on WPI all the way from November up to February now?
A: Yes, that always happen but there has been a consistent revision upwards. I have not seen all of them carefully but the point is that further revisions could happen even to the April number but the April number is so much down that even after adjustment, perhaps we will still stay in the comfort zone.
Q: We did not get a chance to ask you about the trade deficit figure. There is a view from the economists’ side that maybe that was just an aberration for the month of April and that the trade deficit will not be as bad going forward, is that an opinion you share?
A: I think we had also projected for the year as a whole, a lower current account deficit certainly as a proportion of GDP. The April numbers include a very substantial increase in the import of gold, which could happen because of the rush for the import of gold after the sudden drop in the price of gold. That may not get repeated if gold prices continue to remain more or less at this level, demand might settle down here at lower level. I still believe that the overall current account deficit will moderate as a proportion of gross domestic product (GDP) in the current year.
Q: It is 2.8 percent on core inflation, those are the manufactured products inflation number, is not that a very serious breakdown of the pricing power of corporates, wouldn’t this be bad news because the stock markets are after the core inflation number reacting negatively, would this not be a major danger to growth?
A: No, I think the way to look at it is that yes, the pricing power is coming down. The pricing power maybe coming down also because there is a fact that there is very substantial imports also. In some sense, the decline in domestic production in some sectors could be compensated by the increase in the imports. Therefore, there is something happening on the supply side as well. Therefore, if as a result of this, there is greater room or space for monetary policy to act, probably it will revive industrial growth as well. However, I do not see drawing an immediate inference from this to a decline in growth.