RBI in neutral may be reading prices all wrong

By Jeanette Rodrigues

As India’s monetary policy committee begins its two-day meeting, the inflation-targeting central bank may be using flawed price measures as the basis for its swing to neutral policy.

All 50 economists in a Bloomberg survey predict the Reserve Bank of India will leave the repurchase rate unchanged at 6.25 percent on Thursday, as price pressures appear to be picking up. Governor Urjit Patel is concerned about core inflation -- stripping out volatile food and fuel costs -- which he says is worryingly sticky.

But what if the core gauge and the benchmark consumer-price index are off the mark? Patel could be missing a window to lower borrowing costs to spur investment proposals that are near a decade low. Such concerns revolve around three question marks over price data.

Core Concerns
The RBI’s measure of core CPI shows stickiness around 4.8 percent year-on-year since September. This feeds into overall CPI, which accelerated in February for the first time in seven months to 3.65 percent, nearing the 4 percent midpoint of the RBI’s target range. Bloomberg Intelligence’s economist Abhishek Gupta says that’s because the RBI hasn’t fully stripped out fuel costs from its transport basket; once done, core CPI is at 4.2 percent.

"A falling core-CPI inflation suggests that the pricing power at the retail level is sliding due to inadequate demand," Gupta said. "This should signal the central bank to cut the policy rate in order to stimulate demand so that the economy can operate closer to potential."

Consumption Patterns
Another argument pertains to the weights the RBI assigns various consumption patterns in its CPI basket. These are based on the government’s surveys on consumer expenditures in 2011-2012, which show that the average Indian spends about 46 percent of monthly income on food, the main driver of local prices.

More contemporary data published in January pegs private consumption expenditure on food at about 30 percent. Moreover, economists such as Surjit Bhalla, senior India analyst at Observatory Group, have argued that the CPI data ignores spending on financial services, and could be overestimating price pressures by roughly a full percentage point. He declined to comment when reached by email on Friday, citing obligations with Observatory.

Missing Inputs
Economists such as Soumya Kanti Ghosh at State Bank of India say the nation’s statisticians aren’t accounting for the rising e-commerce market, which offers consumers big discounts. Instead, they seek inputs from traditional suppliers, which typically sell at higher prices.

The gap was flagged by the RBI’s external advisory group in 2015, which has since been replaced by the monetary policy panel that votes on rates, and the government was last year said to be planning to include online retailers in its dataset. In a report published last month, Ghosh predicted headline CPI was below 4 percent in March, lower than his previous estimate of about 4.4 percent and the RBI’s 5 percent target.

TCA Anant, the government’s top statistician, said CPI represents the average Indian consumer, and so certain types of consumption -- such as spending on luxury goods -- may not be included in the index. The next consumer expenditure survey will ask people about online purchases, though that’s probably quite small, he said in an interview in New Delhi on Monday.