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Food constitutes a high proportion of India's CPI
Apr 3, 2014

With the RBI now targeting Consumer Price Index (CPI) as an inflation benchmark understanding the constituents of the index will help interpret the movement in consumer inflation in a better way. As can be seen in today's chart, the weight of food, alcohol & tobacco is 50% in India's CPI index. This is highest amongst BRICS. A higher share of these items means Indian CPI is more sensitive to movement in prices of food, alcohol and tobacco when compared to other countries. In fact, as per an article in the Mint, a 5% swing in food prices affects the Indian CPI inflation by 2.5%. And with food prices having remained at elevated levels, CPI inflation in India has hovered in double digits over the last two years. Hence, the RBI continued to maintain its hawkish stance in the recent monetary policy review.

But the question is whether RBI can tame CPI inflation through its monetary policy. Well, not really. Monetary policy tools are ineffective to curb food inflation which is a function of demand and supply. With a high weight of food products in the CPI index, taming inflation by raising interest rates may not fetch the desired results. Good monsoons, better irrigation & storage facilities and bumper harvest will increase supply and reduce food prices. This in turn shall reduce CPI inflation.

Data Source: Mint;
*- Weight of food, alcohol and tobacco as a percentage of CPI; ^- South Asia

This Chart Of The Day was published in The 5 Minute WrapUp - Is it time for investors to switch to debt?

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