Good Morning India!

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India has seen a 'new normal' at least as far as inflation is concerned, over the past 3 years. The average wholesale price inflation (WPI) during this time frame has been around 8.7%. This against an average WPI of 5.2% between 2001 and 2008. Even in 2009 inflation was benign at 3.8%. However, the inflation levels have stuck well above RBI's comfort zone since then. This has also caused many to argue that probably the RBI should revise its inflation target upwards. This approach will also help the central bank be a little more lenient on monetary policy. However, the RBI has refused to go by this logic. While we understand the RBI's reluctance to accept higher levels of inflation as 'new normal', it cannot turn a blind eye to divergence between WPI and CPI (consumer price inflation). Even as WPI has cooled off in recent months (6.6% in January 2013), India has been amongst countries showing the highest rise in consumer inflation over the past year. Thus the RBI should shed its inflation target in terms of WPI and adopt one in CPI terms instead.

Data source: Economic Survey 2012-13

Courtesy:- Equity Master