World Economy

India RBI Head Fighting Inflation

India RBI Head Fighting Inflation
India RBI Head Fighting Inflation

Annualized Consumer Price Index (CPI) inflation rates have eased to five-year lows in India, falling to 5.5% in October down from over 11% a year ago (even prompting some to believe that a rate cut in India’s key lending rate is imminent).

Reserve Bank of India Governor Raghuram Rajan was recently named the 2014 Best Central Bank Governor by Euromoney and rightly so, Forbes reported.

The decline in India’s high inflation rate comes after Rajan took office as the country’s central banker more than a year ago in September 2013 and began raising interest rates after five months into the job even as India’s economic growth was slowing.

Indeed, some may consider this to be India’s Volcker moment as some of the steps Rajan has taken as governor have not been popular, something which Rajan has known all along.

In a speech Rajan gave shortly after becoming India’s central banker, he remarked “the governorship of the central bank is not meant to win one vote or Facebook ‘likes’,… But to do the right thing, no matter what the criticism.”

Now Rajan has results to show his efforts to scale back inflation, no matter how unpopular, have been effective.

 Price Index

India’s Wholesale Price Index (WPI) inflation rate also fell to 2.38% in September from a year earlier, the smallest increase in the price index recorded since October 2009. Historically, the Wholesale Price Index (WPI) has been the primary measure of inflation in India.

However, in 2013, newly appointed RBI governor Rajan had announced that the consumer price index (CPI), the same metric used to measure inflation in developed countries in the US, is a better measure of inflation in the context of monetary policy.

In short, a Wholesale Price Index (WPI) measures the price of goods traded between corporations, rather than goods bought by consumers, which is measured by the Consumer Price Index (CPI).

One major flaw in WPI is that it does not account for changes in prices in the services sector which makes up about 55% of India’s GDP.

India is also seeking to replace WPI with a Producer Price Index (PPI) which does account for the change in prices in the services sector.

One other benefit of the switch is that WPI can be inflated by taxes while PPI tracks an inflation minus tax component.