Sen, who is country director at the International Growth Centre (IGC), said the MPC was right in saying that it was not going by imputations now. He said what worried him and the RBI was that the wholesale price index (WPI) and CPI were moving in different directions.
As the WPI does not include services, the best thing to do is to compare it with agriculture and core CPI (which does not include food and fuels), excluding services, he said.
The WPI showed deflation in April, May, and June at 1.57 per cent, 3.21 per cent, and 1.81 per cent, respectively. When pointed out that the mandatory target is to keep CPI inflation, not the WPI, within 2-6 per cent, he said it was not specified that the CPI would be the only input in the decision making.
Pant too said the MPC did the right thing. “For the abnormal months of April and May, we don’t have the price quotes. These could be taken out for any policy formulation,” he said.
To buttress his point, he said the CPI was calculated in April on the basis of price quotes of 59.5 per cent of the items to be considered. That increased marginally to 63.1 per cent in May.
For instance, the inflation rate in recreation and amusement was higher at 5.7 per cent in April and 5.5 per cent in May from 4.4 per cent in March.
However, these activities were absent in April and May. One can argue there could be the base effect to justify the numbers, but the index value of this service was also higher at 146.5 points in April and 146.8 points in May against 143.7 points in March, Pant said.
Soumya Kanti Ghosh, group chief economic advisor to State Bank of India (SBI), said it was the right thing to do for the RBI.
However, he said inflation numbers were higher than the ones calculated by the NSO because food items, which have a higher weighting of over 45 per cent in the CPI, were consumed more these days than it was done normally.
Madan Sabnavis, chief economist at ICRA, said the RBI was right in not taking into account imputed inflation because the central bank made it very clear that as the economy was crumbling, preserving growth was the over-riding factor.
When the RBI said it would maintain an accommodative stance, it meant the central bank was not going to increase the rates. It also meant the RBI was aware the inflation rate could be 6 per cent in August and September as well.
“These are unusual circumstances. The RBI knows that inflation is much higher but by taking the stance that monetary policy is going to be accommodative it has given the signal that interest rates are not going to be increased,” Sabnavis said.
Aditi Nayar, principal economist at ICRA, said the prices of fuels had been inflated by higher excise and value-added tax and that was adding to inflationary pressure.
The inflation rate of fuel and light rose from 2.69 per cent in June to 2.80 per cent in July.