CPI, WPI-based inflation seen converging
The Hindu Business Line, May 12, 2009, Page 15
The Hindu Business Line, May 12, 2009, Page 15
Expected to be at around 5% by end of 2009-10.
K.R. Srivats, New Delhi
Former Reserve Bank of India (RBI) Governor, Dr Y.V. Reddy, sees the wholesale price index (WPI) and the consumer price index (CPI) converging around five per cent by end of fiscal 2009-10.
“I am sticking my neck out. My own hunch is they (WPI and CPI) will converge. CPI will start coming down,” Dr Reddy told Business Line in an interview. He is here to launch his book India and the Global Financial Crisis: Managing Money and Finance.
Asked the basis for such a prediction, Dr Reddy said that it was the lagged effect of the various price changes that had happened. He also said that his comment on convergence was without reference to the spillover consequences of monetary and fiscal measures.
“WPI and CPI should be looked together and you should look at it for the next 12-18 months. One should recognise that it (convergence) is possible,” he said.
On inflation expectations, Dr Reddy said that given our history, it is very difficult to convince people that in India there is deflation threat or inflation is coming down. “I agree that there is an exit problem for fiscal and monetary… but we have multiple instruments and it should be possible to handle excess liquidity”.
Asked to comment about the central bank’s decision to raise interest rates in June 2008, Dr Reddy replied “please read my book”.
On RBI
In his introduction to the book, Dr Reddy writes that RBI taking responsibility, even if decisions had been taken in deference to the government’s wishes, is relevant both for the conduct of monetary policy and select actions on the regulatory front.
“The RBI articulated a need for careful consideration of the monetary policy in response to high inflation, as explained in detail in the governor’s remarks on inflation in Pune on June 23, 2008. However, the RBI announced monetary measures on June 24, 2008. Both statements explained in detail the dilemmas and time-dimensions involved, and indicated the complexities in the conduct of monetary policy and communications with the financial markets.
“These statements illustrate that once expectations had been built in financial markets around the government’s preferences, which is what happened vis-À-vis that led to the statements made above, the RBI had to fulfill those expectations as far as possible to avoid giving an impression of serious differences”
To a question on ‘financial protectionism’ in developed countries, Dr Reddy said that his book had “very clearly” addressed this topic. He highlighted that the global wisdom on the financial sector was changing and global rules of the game were likely to change.
“Financial institutions in advanced economies are now being heavily subsidised (capital). The earlier rules of the game were based on the assumption that there was a level playing field and government should not interfere.
“Now you have a situation, where it is quite possible that reasonably healthy banks in developed economies will also be taken over. Because… the level-playing field has been removed. This also applies to free trade agreements where there are financial services agreements. All of them were based on the ground that markets were operating normally with a level-playing ground”.
K.R. Srivats, New Delhi
Former Reserve Bank of India (RBI) Governor, Dr Y.V. Reddy, sees the wholesale price index (WPI) and the consumer price index (CPI) converging around five per cent by end of fiscal 2009-10.
“I am sticking my neck out. My own hunch is they (WPI and CPI) will converge. CPI will start coming down,” Dr Reddy told Business Line in an interview. He is here to launch his book India and the Global Financial Crisis: Managing Money and Finance.
Asked the basis for such a prediction, Dr Reddy said that it was the lagged effect of the various price changes that had happened. He also said that his comment on convergence was without reference to the spillover consequences of monetary and fiscal measures.
“WPI and CPI should be looked together and you should look at it for the next 12-18 months. One should recognise that it (convergence) is possible,” he said.
On inflation expectations, Dr Reddy said that given our history, it is very difficult to convince people that in India there is deflation threat or inflation is coming down. “I agree that there is an exit problem for fiscal and monetary… but we have multiple instruments and it should be possible to handle excess liquidity”.
Asked to comment about the central bank’s decision to raise interest rates in June 2008, Dr Reddy replied “please read my book”.
On RBI
In his introduction to the book, Dr Reddy writes that RBI taking responsibility, even if decisions had been taken in deference to the government’s wishes, is relevant both for the conduct of monetary policy and select actions on the regulatory front.
“The RBI articulated a need for careful consideration of the monetary policy in response to high inflation, as explained in detail in the governor’s remarks on inflation in Pune on June 23, 2008. However, the RBI announced monetary measures on June 24, 2008. Both statements explained in detail the dilemmas and time-dimensions involved, and indicated the complexities in the conduct of monetary policy and communications with the financial markets.
“These statements illustrate that once expectations had been built in financial markets around the government’s preferences, which is what happened vis-À-vis that led to the statements made above, the RBI had to fulfill those expectations as far as possible to avoid giving an impression of serious differences”
To a question on ‘financial protectionism’ in developed countries, Dr Reddy said that his book had “very clearly” addressed this topic. He highlighted that the global wisdom on the financial sector was changing and global rules of the game were likely to change.
“Financial institutions in advanced economies are now being heavily subsidised (capital). The earlier rules of the game were based on the assumption that there was a level playing field and government should not interfere.
“Now you have a situation, where it is quite possible that reasonably healthy banks in developed economies will also be taken over. Because… the level-playing field has been removed. This also applies to free trade agreements where there are financial services agreements. All of them were based on the ground that markets were operating normally with a level-playing ground”.
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