More Stories

Informist, Tuesday, Dec. 3, 2024

 

By Krity Ambey and Aaryan Khanna

 

NEW DELHI – India should revise its CPI inflation series every three years given that households' expenditure patterns change at a fast pace, according to Janak Raj, former member of the Monetary Policy Committee. The latest Household Consumption Expenditure Survey shows the weight of food in people's monthly spending has come down and "it should be reflected in the new CPI series as early as possible", 

Raj, a career central banker who served as one of the three representatives of the Reserve Bank of India on the MPC from February 2020 to May 2020, told Informist in an interview.

 

The current CPI inflation series is based on the 2011-12 (Jul-Jun) consumer survey. While the Ministry of Statistics and Programme Implementation did conduct a household survey in 2017-18, it was junked by the government citing data quality issues. According to the recently concluded second back-to-back consumption survey for 2022-23 (Aug-Jul) the proportion of household expenditure on food fell to 46.38% from 52.90% in 2011-12 for rural households and to 39.17% from 42.62% for urban households.

 

In the current CPI series, 'food and beverages' have a weight of 45.86% in the CPI basket. The new CPI series with updated weights and a new base year is expected to be released in early 2026.

 

"Now the time has come to revisit that series immediately and revise the weights, and continue to tweak them frequently in the future also," Raj said, adding that the weight of food items in the new CPI basket should come down "significantly" going by the 2022-23 survey. "That should be helpful for monetary policy. It should give greater manoeuvrability to the RBI."

 

The high weight of food in the CPI basket has meant volatility in prices of some items such as vegetables has exerted immense influence over the headline inflation rate, leading to the government calling for monetary policy to focus on inflation excluding that for food items as it can’t impact the supply-side. The RBI has rebuffed such suggestions, saying that food prices are a key consideration for consumers and high food inflation can have second-round effects on the overall price level, which must be contained.

 

GUIDANCE AND COMMUNICATION

During Raj's time in the rate-setting panel at the peak of the COVID-19 pandemic, the committee used its forward guidance to calm financial markets as the RBI infused record levels of liquidity and the MPC cut interest rates sharply to 4.00%. However, over the last year or so, the lack of guidance from the central bank has been telling, with Governor Shaktikanta Das refusing to provide any assurances on the future path of interest rates on account of the uncertainties that plague the global environment.

 

According to Raj, who now leads the macroeconomic segment of New Delhi-based think tank Centre for Social and Economic Progress, the MPC may never be able to match the expectations of the markets when it comes to forward guidance, with the former rate-setter of the opinion that the current level of communication from the central bank being sufficiently transparent.

 

"Financial markets, of course, would like central banks to be much more transparent than they already are. It's not always possible," he said, adding that the RBI can't always communicate as explicitly as the US Federal Reserve. "Many other inflation-targeting central banks don’t give statements by individual members and some central banks don't even give individual votes."

 

Unlike the US Fed, the RBI does not explicitly give its projections on the trajectory of interest rates as such forecasts depend on the "comfort level of the central bank and how mature financial markets are. They (the US) have more mature financial markets than many emerging markets," Raj said.

 

CAPEX FALSE DAWNS

Raj also expressed his disappointment over the status of private capital expenditure. "In the last several years, we have been talking about a pick-up in private capex--every time we felt that private capex was picking up, it didn't materialise. I would say that we had many false starts in the past."

 

The Indian government ramped up its capex to revive the economy after GDP contracted by 5.8% in 2020-21 in the hope that it would crowd-in private investment. However, it hasn't had the expected impact on private capital expenditure, according to Raj.

 

"The government also cut corporate tax rates in September 2019, but despite that, private capex has not picked up. Many corporates have conducted share buybacks and increased their dividends. They have also deleveraged, but they have not initiated capex investment in a big way."

 

Raj, though, remains hopeful and expects private capex to pick up. "The private capex cycle is in a downturn for the last several years. But at some stage, it has to turn. It's only a matter of time when it turns. I can't tell you exactly when it will turn. But I'm sure at some stage it will turn."  End

 

Edited by Saji George Titus

 

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

 

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2024. All rights reserved.