Indian firms battling towering debts are calling for more interest rate cuts as they worry the country’s central bank is tying monetary policy too much to consumer inflation and ignoring the longest streak of wholesale price falls on record.
Reserve Bank of India (RBI) governor Raghuram Rajan started using consumer prices as the bank’s key inflation measure last year to focus policy on ordinary Indians. This year, the link between consumer prices and monetary policy became even stronger as the RBI formally adopted an inflation-targeting regime.
But a growing divide between consumer and wholesale inflation has revived a long-standing debate on which inflation measure should be used to determine India’s interest rates. The wholesale price index (WPI) has been falling since late 2014, dragged down by lower energy costs, while the consumer price index (CPI) is currently at 5 per cent.
There is no clear proof that CPI is far superior to WP
The RBI has cut interest rates three times this year as corporate profits shrank and companies small and large shied away from new investments. But India’s hundreds of indebted companies are saying that’s not enough. They argue the RBI has room to further ease policy, as the WPI has dropped for an unprecedented seven straight months.
“It may not be suitable to be focused on only one (inflation) index at a point in time,” said R. Shankar Raman, chief financial officer of infrastructure conglomerate Larsen & Toubro. “Just as focus on WPI alone is not going to serve the purpose, focusing on CPI alone is also not going to serve the purpose.”
That echoes the argument made by India’s chief economic adviser, Arvind Subramanian, who last month suggested that in “unusual times” of stress, a policy based on consumer prices alone may not reflect firms’ realities.
Rajan has not publicly spoken about the discrepancy, but some policymakers have attributed the widening gap between the two indices to commodity prices, and not to deflationary forces in the economy.