The consumer price index (CPI) series was launched in January this year to more accurately capture inflation at the retail level – or the actual prices that consumers pay – rather than the wholesale price inflation, which only reflect factory gate prices. It measures retail prices in major food groups, fuel, clothing, housing and education across rural and urban India.
The Reserve Bank of India, however, uses wholesale inflation in its policy formulation.
Last week, headline inflation, which is measured by the Wholesale Price Index, came in at 6.87 per cent, a 32-month low due to lower food and fuel prices. However, analysts pointed out soon after that the fall could be short-lived due to a weak monsoon.
RBI governor D. Subbarao said the headline inflation was “way above” the central bank’s threshold level. Typically, 5 per cent is considered as a threshold level of inflation in a high growth economy.
RBI needs inflation to fall sharply if it plans to cut borrowing rates and stimulate growth in the economy. RBI will decide on any monetary action next on September 17.
Higher inflation rates will almost certainly make the central bank’s job of balancing growth and prices tougher. With a weak currency and tight liquidity, India has been vocal in its calls for an interest rate cut to spur growth. The RBI cut rates by a higher-than-expected 50 basis points in April, but added that there was little room for more cuts in the future. It also left rates untouched in its policy review in June.
India’s growth has slowed to 6.5 per cent in fiscal 2012, dragged down by a nine-year low of 5.3 per cent in the March quarter. Analysts predict India to grow at less than 6 per cent. Barclays Bank on Tuesday cut India’s GDP growth forecast to 5.8 per cent blaming supply shocks. This includes industrial disputes, weak monsoon, weak global demand and a policy inaction.