The Reserve Bank of India (RBI)'s blinkered focus on consumer price inflation while setting monetary policy is fallacious and ultimately dangerous. The vast differential between the consumer price index (CPI) and the gross domestic product deflator (more closely linked to wholesale price index) is one of the reasons behind the poor asset quality in the Indian banking sector. The lion's share of borrowers from the banking system do not earn their revenues from the basket of products in the weighting of the CPI. Rather their revenues, and ultimately their viability, are more closely linked to the price of industrial goods that are better reflected by non-food manufacturing WPI. Despite acknowledging this fact, it is a matter of exasperation for most corporates and bankers that the RBI has chosen to focus more on the CPI in managing liquidity and interest rates. Is it any surprise therefore that even good quality corporations are now turning into non-performing assets?
Rohan Soares, Mumbai
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