Subbarao: New CPI narrow for monetary policy decisions

Subbarao: New CPI narrow for monetary policy decisions

The new series of consumer price index (CPI) is not enough for a robust statistical analysis of of prices, Reserve Bank Governor D Subbarao said today.

He also said the new CPI has an excess focus on food prices, which has a 50 per cent weight. House rents, which account for 10 per cent, are also a cause for concern given doubts over the efficacy of the prices, he added.

"The new CPI has only 19 data points which is not sufficient for a statistically robust analysis," Subbarao, who demits office on September 5, said while speaking at the Statistics Day conference at the RBI headquarters here.

Posing the question if there is a case for shifting focus to the CPI, Subbarao said even in case of such an eventuality, the central bank will not abandon the wholesale price index (WPI) as a tool to monitor producer prices.

"My own view is we will not, because analytically we need to develop a series of producer price indices that will help us gauge how price momentum builds up in the economy."

Subbarao said RBI has traditionally focused more on WPI because of the deeper analytical insights it offers.

"We've traditionally used WPI because we thought the legacy CPI is not representative enough for the entire population. WPI is more extensively researched by way of its empirical relationship with other variable like output, monetary aggregates and interest rates and presents richer analytical insight," he said, conceding that other central banks use CPI for policy formulation.

The new more inclusive CPI was introduced in 2011 and ever since that Subbarao has been repeatedly asked if the RBI will rely more on the new indice. His uniform response has been that the central bank uses all the available data points, including the CPI and WPI, in its policy formulation.

The wedge between the WPI and CPI number has consistently been high. For July, WPI came in at 5.71 per cent while the CPI was still hovering around the double-digit mark.

The government aims to bring down the CAD, which touched a record high of 4.8 per cent of GDP in 2012-13, to 3.7 per cent of GDP (USD 70 billion) this fiscal. GDP growth slowed to a decade low of 5 per cent in the last fiscal. The RBI has pegged growth at 5.5 per cent in this fiscal.

Sacrificing growth on account of high interest rates was only for the short term, Subbarao said.

"...RBI had run a tight monetary policy not because it does not care for growth but because it does care for growth."

The rupee, which closed yesterday at a record low of 68.80 against the dollar, gained 225 paise to 66.55 today.

Subbarao said it is the RBI's "avowed policy" not to target an exchange rate and it has stayed true to that policy.

"Our efforts over the last few years, particularly the last three months, have been to smoothen volatility as the exchange rate adjusts to its market-determined level so as to make the near-term cost of adjustment less onerous for firms, households and banks," he said.

Referring to criticism that the RBI's measures have been confusing and betrayed a lack of resolve to curb volatility, Subbarao said, "Let me first of all reiterate that our commitment to curbing volatility in the exchange rate is total and unequivocal."
He, however, admitted the RBI could have communicated the rationale of its measures more effectively.

"But our actions were consistent. Our capital account measures were aimed at encouraging inflows and discouraging outflows. Also, we tightened liquidity at the short end to raise the cost of short-term money so as to curb volatility," he said.

At the same time, he added, the RBI wanted to inhibit the transmission of the interest rate signal from the short end to the long end as that would hurt the flow of credit to the productive sector of the economy.

" is not the policy of the RBI to resort to capital controls or reverse the direction of capital account liberalisation," Subbarao stressed. The RBI's measures did not restrict inflows or outflows by non-residents, he added.

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