Topic: Indian Economy

Sir, recently RBI has taken CPI as measure of inflation instead of WPI and now due to agreement with govt, RBI is responsible for controlling inflation/prices. But CPI has high food component about 60% which cannot be controlled through monetary policy. So, is it fair and is it plausible that RBI can control the inflation effectively and solely

Cannot be controlled through monetary policy, can you explain this?  Is there a difference in the 'basket' between CPI and WPI?

yes sir.. CPI and WPI baskets contain different items with CPI giving more emphasis to food. Sir, food inflation is mostly due to failure of supply and also, reducing/ increasing interest rates cannot affect this. and unlike businesses which mostly depend on credit policy normal consumers don't depend on credit in case of food.

I would like to double check that, but if there is a major share of food in CPI basket then it is more in touch with the poor - isnt it? so it is better index.

yes sir, CPI is better index to represent inflation, but I feel that RBI monetary policy alone couldn't control inflation   

Yes, it will be a tougher task for the RBI as agriculture is not that sensitive or dependent on credit

This is where the agro food processing industry comes in. This is not a well developed sector in our country. Government would like to ensure that the supply demand gap in food sector and the perishable nature of the commodity can be overcome. RBI can make the banks to invest in such industries which will mitigate the vagaries of the food production and in that way ensure that the CPI basket items too come in the 'control' bracket. Though it is 'difficult' task, it is the 'right' task.

ok sir. But I couldn't understand why RBI came into agreement with government about inflation control when it knows its policy is not effective

RBI is not for its sake !!! What is best for the country has to be done !!! And government is 'for' the people.

The basket itself may have different items, but I am not sure the ratio changes. WPI - Whole sale price index (so might not include items that are in the shop shelf). CPI - Consumer price index (it might include items on the shelf). The difference between WPI and CPI must be the 'middle men' cost.

Sir, I agree that in the better interests, RBI took the task. But I saw some articles where they say it's difficult to control food inflation through RBI measures and only government intervention can help

Difficult, but the right thing to do

ok Sir..But how can it be the right thing here? in case of food inflation sir

Why should inflation be under control?

Sir, so that poor should not suffer the effects of high prices

Thats right, if inflation is high people's purchasing power comes down so the demand for goods will come down this will result in retardation to economic growth.

Since we are developing country, if most of our country men spend all their money in food (which they will have as first priority) they will have lesser money for purchasing other things - say cell phone that is bad for the economy?

Now if the food inflation is less, and the prices of white goods increase it will not affect most of our people right? Thats why it is better to control the 'inflation' which will have the most impact on the spending power of the citizen. CPI is thats why definitely better then WPI.

If RBI finds it difficult to control then it can lay the ways and means to enable itself to do so or simply say CPI is not the better index it cannot agree to CPI as the better index and say since it is less amenable to its intervention, it will not do so.

It can seek the government's intervention to make the food products more amenable to its intervention

Agro food processing- Make agriculture not dependent on time. agro products when they have longer shelf life are more amenable to credit intervention.