Informist, Thursday, Sep 12, 2024

MUMBAI – India's new Consumer Price Index should include home loan interest payments as a component as it would lead to a more accurate measurement of domestic inflation and, in turn, more appropriate policies, Soumya Kanti Ghosh, State Bank of India's group chief economic adviser, has said.

Writing in a report today, Ghosh said that such a move would make the transmission of monetary policy "more effective". At present, house and garage rent makes up 9.51% of the entire CPI basket, which has not been revised in more than a decade. According to experts, this leaves the consumption basket, and therefore, the inflation rate, heavily outdated.

However, with the statistics ministry having concluded the second of its back-to-back Household Consumption Expenditure Survey in July, it is expected that the CPI basket will soon be revised, with a new inflation series likely to be announced in early 2026. The results of the aforementioned survey are used to revise the CPI basket.

The expected release time of the new CPI inflation series will coincide with the review cycle of India's flexible inflation target, which currently is 4% within a band of 2-6%. This target, which was last announced in March 2021, is applicable for a five-year period, and is set to be reviewed in early 2026. The Indian government, in consultation with the Reserve Bank of India, must announce the inflation target for the five years starting 2026-27 by the end of 2025-26.

"In countries like UK, mortgage interest payments are included as an item in CPI, to make the transmission more effective (absent in India). For example, in UK, the weight for mortgage interest payments is based on a modelled mortgage incorporating both repayment and endowment components over a long period. Each of these is updated annually and expressed in terms of average weekly expenditure," Ghosh said in his report.

"Such mortgage interest payments are included in CPI basket in countries like UK, to make the transmission impact more effective. The inclusion of interest-sensitive items in CPI basket will make it more appropriate for policy formulation," he added.

As per latest data for July, India's house and garage rent inflation was 2.63% and last exceeded 6% in October 2018. However, this is at odds with rent increases often reported on the ground. According to property website magicbricks' latest rental index report, rents in India were up 14.6% year-on-year in Apr-Jun. End

Reported by Gowri Lakshmi

Edited by Aditya Sakorkar

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