RBI’s Inflation Index

BE/RBINOTE/50/2019

• It was five years ago that RBI was sticking on to the Wholesale price Index (WPI) as its nominal anchor for arriving at the Inflation rate and every monetary policy saw the Central Bank raise the interest rate to curb inflation.
• Later it was the Consumer Price Index (CPI) which was RBI’s anchor for arriving at the inflation.
• That means the Retail Inflation captured prices at the consumer level and included services which were a growing elements.
• The problem with WPI was that the services were not included and around 64% weightage was being given to manufactured products.

Why this Shortfall in the Price Index

1. The strange thing to accept is that this shortfall in the WPI is the thing which is more applicable today.
2. How is the WPI arrived at? It captures the prices at the Factory, Mandi and more so at the supply chain level of the goods before it could reach the consumer.
3. Here, we should say that a collapse in the WPI reveals about the NIL pricing power of the Indian Companies. This aptly suits the current situation where we see that there is a continuous slowdown in the demand.
4. Here is a chart which shows that there is a collapse in the manufactured products inflation within WPI which showed a minus sign of 0.42% in September this year.
5. That means it has slipped into deflation. The reason for this is a shortfall in the global commodity prices, which has brought down the basic metal components and also other products.

Other Reasons for the Slowdown in the Economy:

• Also analysts say that a steep fall in the WPI indicates that the slowdown in demand is spread across the entire economy and thus has eroded the pricing power of Indian manufacturers.
• This is clearly indicated through a discounted sale of auto industry goods.
• Out of 22 different product categories, the fall in inflation was observed to be very steep in 15 categories and more so 10 were in deflation in September within the manufactured products index.
• According to HDFC Bank Ltd experts, WPI is a good input in assessing the economic growth since it captures imported inflation or disinflation too.
• It can also be seen that most of the multilateral organizations have slashed their forecast on India’s Economic growth for the financial year 2020.
• Moody’s is the company which has given the highest forecast 5.8% and RBI’s forecast stands at 6.1%.
• Possibly the WPI Route would show how deep the slowdown in growth is and the positive expectations in both business and consumer.

Let us wait and see