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New CPI too narrow for monetary policy decisions: Subbarao

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 on Friday.

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 5 September, 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.

'We have had a problem in calibrating our policy whenever there has been a divergence between CPI and WPI and more importantly, in communicating our policy...it poses a major challenge in assessing inflation dynamics in the short term,' Subbarao said talking of RBI's predicament.
'In our country, we have a problem of excess of inflation measures,' the RBI chief said, adding there is the WPI, three legacy CPI indices and the new CPI indices.

He acknowledged that the analysts have criticised the WPI for being flawed and also for not considering the services sector, which contributes two-thirds of the economy. Maintaining that other central bankers are 'reticent' talking about it, Subbarao said there is no single equilibrium exchange rate which is the most acceptable one to predict the real value of a currency.

He stressed the need to deepen the statistical research capabilities to understand how developments in the external economy spillover in our economy. Meanwhile, praising the the Reserve Bank’s move to open a forex swap window to meet dollar requirements of three public sector oil marketing companies, Assocham on Friday said it has helped shore up the rupee and reduced volatility in the currency market
‘RBI’s efforts to shore up the rupee and curb volatility in the currency market via a special Dollar swap window for oil companies appears to have comforted the market,’ Assocham President Rana Kapoor said.

The RBI on Wednesday opened a special window to help three PSU oil marketing firms including IOC, HPCL and BPCL, which need about $8.5 billion every month to meet their daily foreign exchange requirement, in a bid to check the rupee’s free fall.

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