RBIs main goal must be to deliver year-on-year CPI inflation in the range of 4 to 5 per cent
The key pillars in the Indian statistical system,such as IIP and GDP data,are suspect. In contrast,the Consumer Price Index (CPI) is a reasonably good measure of inflation. In recent years,the authorities have further improved the data collection and methodology of CPI. The first data release from the new methodology shows 7.65 per cent inflation in January.
The traditional CPI-IW (CPI for industrial workers) inflation has decelerated substantially,from year-on-year inflation of 10.06 per cent in September 2011 to 6.49 per cent in December 2011. This had raised hopes the inflationary dragon had been slain. However,there were three reasons for caution. CPI-IW inflation is quite volatile and the apparent progress could easily be reversed. Household inflation expectations continue to be in the double-digit range. Rupee depreciation makes tradables costlier. These three factors have suggested a cautious approach in declaring victory over inflation. The new CPI data,at 7.65 per cent,remains well outside the target zone of 4 to 5 per cent. This shows the inflationary dragon had not been slain as of last month.
Price stability is the most important element of macroeconomic stability. The RBI needs to fully devote itself to this one main goal: of consistently delivering year-on-year CPI inflation in the range of 4 to 5 per cent. India has a dismal record on price stability,with substantial fluctuations of prices that constantly upset the private sectors best laid plans. In recent years,speeches by RBI officials have veered into smug exercises of self-praise. A greater recognition is needed that RBI has failed on the central banks prime task: delivering price stability. Achieving price stability will be a slow and long battle,one critically interwoven with household expectations. As long as households expect high inflation,and as long as households see the RBI is not serious about inflation,there will be trouble in terms of high and volatile inflation. Low and stable inflation is critically connected with two factors: the extent to which RBI is fully focused on delivering this one target and the extent to which households believe inflation will be low and stable. Macroeconomic stability is an extremely important foundation of high GDP growth. It will not be hard to achieve,but we need to push every day towards RBI reform as the tool for achieving this.