The country needs to ensure that the weights used for aggregating the headline consumer price index are aligned with more recent data, says Shashanka Bhide, external member of the Reserve Bank of India’s Monetary Policy Committee (MPC). Price pressures judged by GDP deflator reflect a much broader set of commodities than the CPI, he told FE.
The “recent data” Bhide is pointing to include the Factsheet on Household Consumption Expenditure Survey (HCES) 2022-23, which revealed that food’s share in the monthly per capita consumption expenditure (MPCE) of households – at an aggregate level – stood at around 41-42% in 2022-23, which is around 5 percentage points (pps) lower than the current weight of ‘food and beverages’ in the CPI.
In FY24, CPI inflation averaged 5.4%, while GDP deflator averaged around 1.5%. The deflator was starkly low as it predominantly gives weightage to WPI inflation, which averaged (-)0.7% during the same period.
The MPC looks at consumer price scenarios specifically as consumer price inflation is the policy target, says Bhide. “It is relevant as consumption is the largest component of aggregate demand. However, indicators such as WPI and GDP deflator are also looked at in judging the price pressures,” he says.
The MPC member further says that “all other” data are reviewed for policy decisions but the inflation target is fixed on CPI, as it is a “good indicator” for policy for which data are available at a monthly frequency. The RBI’s aim is to ensure that CPI inflation stays at 4% on a durable basis, which at present stands at 4.85%.
The RBI has projected CPI inflation to average 4.5% in FY25, but extreme weather events in the near-term and volatility in crude oil prices may pose a threat to the inflation outlook. For instance, the RBI sees CPI inflation averaging 4.9% in Q1 FY25, but many economists in the wake of the heatwave – likely to hit several areas in India in April-June – expect it to average around 5-5.2% during the quarter.
On growth, Bhide said that the “recent strong growth momentum” (of 8% plus) has been a “surprise” in 2023-24. In the first three quarters of FY24, real GDP grew by 8.2%, and for the entire year, GDP is seen growing at 7.6%, as per the National Statistical Office’s (NSO) second advance estimates (SAE).
The RBI has projected real GDP growth at 7% in FY25, much lower than the growth recorded in FY24. Many economists, however, expect GDP to grow between 6.5-6.7% in FY25.
“While we now have 7% plus growth in the last two years, 7% growth is a strong performance,” says Bhide while adding that the growth has been achieved despite the adverse elements such as the poor monsoon in 2023 and the weak global demand conditions.
“We are now looking at the prospects of a better monsoon but global growth is still below the historic averages,” he says.
The India Meteorological Department (IMD) has projected an “above-normal” monsoon during the period of July-September 2024, which is expected to keep food prices under check, and also revive rural demand, which is stagnating at the moment.
On the possibility of a rate cut, Bhide says that it would depend on the likely scenarios in the coming few quarters. “7% growth in 2024-25 would still be a strong growth performance and it will require a stable positive macro environment to sustain.”
