RBI's Subbarao: Core Inflation Gives Better Sense Of Future Price Trends

04:04, 17th July 2012

(RTTNews) - Reserve Bank of India Governor Duvvuri Subbarao said Tuesday that the core inflation, that excludes prices of food and energy, gives a better sense of the future price trends as it is less volatile. He also hinted that the country's growth may have slowed further in recent months.

Core inflation does have statistically significant predictive power, if the longer series of over three years is taken into consideration, he said during a speech at the sixth Annual Statistics Day Conference in Mumbai.

However, the use and interpretation of core inflation remains contentious in advanced economies, though food and fuel constitute a relatively small proportion of their consumption basket, the central bank chief added.

Therefore, he said, there are reasons for the core figure to be more contentious in economies like India where food constitutes nearly 50 percent of the consumption basket and fuel has a weight of 15 percent.

Yesterday, Subbarao dampened expectations of another interest rate reduction at the July 31 monetary policy review meeting, saying that India's wholesale and consumer price inflation levels are way above the bank's comfort level.

India's wholesale price inflation slowed to a five-month low of 7.25 percent in June on easing fuel costs, official data showed Monday.

Potential output growth may have further fallen to around 7.5 percent, Subbarao said, citing the latest assessments. The International Monetary Fund yesterday cut India's growth forecast for 2012 sharply to 6.1 percent from 6.8 percent. Next year, the economy is expected to grow only 6.5 percent, much less than April's prediction of a 7.3 percent expansion.

Detailing the challenges in assessing India's potential growth rate consistent with the objective of low and stable inflation, the central banker said the Reserve Bank had reported the potential output of the Indian economy to have dropped from 8.5 percent pre-crisis to 8 percent post-crisis in its annual report for 2009/10.

On the recent LIBOR rate controversy, he said the counterpart of LIBOR in India is the less used MIBOR which is set by FIMMDA-NSE. The Reserve Bank periodically reviews the procedure for selecting the banks and the methodology of polling so as to ensure that the reference rate remains a true reflection of market activity, he added.

Back to Forex News