See food inflation rising; CPI better indicator: Rangarajan

Consumer price index (CPI), which rose 4.41 percent year-on-year (Y-o-Y) in September, is likely to continue its uptrend.

Former Reserve Bank Governor C Rangarajan says prices of pulses and vegetables  are likely to rise even now. In an exclusive interview to CNBC-TV18, the former PMEAC chairman said the better indicator — between consumer price inflation and wholesale price inflation — has been chosen to determine inflation. "Policy should be largely guided by the CPI," he said.Below is the transcript of C Rangarajan's interview with Latha Venkatesh, Sonia Shenoy & Guest Editor Adrian Mowat on CNBC-TV18.Adrian: Let us talk about inflation targeting framework, would you have welcomed this when you were the governor of the Reserve Bank of India (RBI)?A: Yes, I think I have always held that the dominant objective of monetary policy is control of inflation and therefore I had favoured the idea of ensuring price stability as the key objective of monetary policy. We had not at that time adopted inflation targeting as a specific framework but we have worked towards it. We have worked towards an idea that the dominant objective and therefore the course of action that the Central Bank of the country must pursue should be towards price stability.Adrian: So we now have an environment where there is a big divergence in inflation a positive consumer price index (CPI) number nearly a year of wholesale price index (WPI) deflation and so the level of real rates seem to be quite dramatically across the economy. What do you think the RBI should focus on, the real rates for the industrial sector that might be more influenced by WPI or the real rates for the household, which would be a CPI function?A: For a long time, we used to look at what is happening to the WPI inflation because those were the numbers, which were available with a short time lag but over a period of time particularly the last few years, the CPI inflation numbers have also started coming in with more or less the same time lag as the WPI. Therefore, the choice between the two now rests on which is a better indicator. For some reasons or purposes, WPI is a good indicator. However, by and large since price stability as an objective of monetary policy essentially means stability of prices from the point of view of the larger society consumer price inflation index is the key as far as monetary policy is concerned.However, at the same time, the monetary authority should not ignore what is happening to the WPI inflation. After all even in inflation target, there is certain margin that is given to the monetary authority and therefore in using that margin or in using the discretion, the monetary authority should look at the WPI inflation also. But I would say given the fact that the CPI inflation numbers are now available with the same frequency and with the same time lag as the WPI inflation, the policy should be largely guided by what is happening to the CPI inflation.As far as the real rate of interest is concerned, theory does not specify about the policy rate of the Central Bank. Theory only explains the real rate of interest in terms of the real rate of interest either to the saver or to the investor. The policy rate is something which is very different. I would therefore say that the real rate of interest is something that -- as far as the policy rate is something lower than the real rate of interest for the savers.Latha: How do you see the monetary policy steps in the next two-three quarters? We don’t have any forecast on WPI from the RBI but they do give us the CPI forecast and they see it rising to about 5.5 to 6 percent in Q1 next year and then going down to under 5 percent in Q1 of 2017, given this trajectory, would you expect that there is a lot of elbow room to cut?A: Obviously, the latest policy announcement made a deeper cut than was expected even by the market. Therefore, in that sense the cut in the policy rate is frontloaded. That is a good thing. Yes, I think the indications are that the CPI inflation will start rising because the fact that the monsoon has not been that good. We could expect some little rise in the overall food inflation not necessarily the cereals but pulses, vegetables and so on. Therefore the taking into account the base effect and so on, there will be a slight move up as far as the price level is concerned.We need to watch it but if it happens that the CPI inflation happens to be below somewhat the expectation then we could have another cut in the policy rate but otherwise I don’t see any immediate prospect of a cut in the policy rate.Adrian: If we can go back to sort of long-term projections for inflation, do you think India will be successful in bringing down its long-term structural CPI with some of the policy initiatives we are seeing particularly in the agricultural sector?A: I do not know whether we would be able to bring it down below 4 percent. 4 percent of course is high as compared to many other countries and we need to bring it down but we do have a lot of structural rigidities in the system. I think it is going to be very difficult to bring it below 4 percent in a very sustained way. Our desire would be to bring it down but I do think that we would be very successful or we will be treated as being successful if we keep the inflation rate at about 4 percent.Latha: You think that is possible?A: I think it is possible. I think it is reasonable but the idea of going to 2 percent or something like that, I do not think that sustained way it may be possible. Therefore, we should be modest in our expectations and pursue towards a goal of getting the inflation rate in the sustained rate at 4 percent.Sonia: The biggest problem that we have had this year has been the global growth slowdown and a lot of Central Bankers like People's Bank of China (PBOC), the European Central Bank (ECB), are all feeling the need to add more stimulus into their economies, almost six years after the recovery started. Is that a sign of perhaps more trouble as far as growth is concerned? Do you expect more slowdown in the global economies?A: Perhaps global economy taking all countries together, the growth rate could slowdown even though the performance in the United States perhaps would be better.Therefore, there will be a global slowdown but that does not necessarily mean that the Indian growth rate will have to slowdown. We are interconnected, global factors are important but the growth rate of the Indian economy has not always been influenced only by the global factors. We have had our slide down and therefore we are in the process of recovery and I would say that perhaps the growth rate of 7.5 percent immediately is a possibility and we should try to maintain it at that level.