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April 9, 2012Mumbai

CRISIL Research releases alternative measure of core inflationCRISIL Research, Indias largest independent and integrated research house, today released an alternative

measure of core inflation - CRISIL Core Inflation Indicator (CCII). CRISIL Research believes that CCII is a

better indicator of underlying demand pressure on prices and is more stable than the existing core inflation

measure - non-food manufacturing inflation. It can, therefore, supplement the existing indicators that influence

the RBIs interest rate decisions.

Non-food manufacturing inflation excludes fuel and food prices from the Wholesale Price Index (WPI) basket.

CCII adds processed food to and takes out base metals from this existing measure. It thereby improves upon

the current measure of core inflation in two respects. First, it reduces volatility in core inflation by excluding

base metals prices. Volatility in metal prices, measured by standard deviation, more than doubled to 8.5 percent during April 2005-February 2012 compared to the second half of 1990s. Second, it captures demand-side

pressures better, as it includes processed food articles, prices of which are influenced more by demand

strength. This is in line with the practice followed by many other central banks.

CCII is especially relevant in todays uncertain and volatile economic environment. For instance, the temporary

collapse of international base metal prices during the global economic crisis led to a sharp decline in core

inflation in 2009. This created a misleading impression that domestic demand too had collapsed and triggered a

sharp policy easing by the RBI.According to Dharmakirti Joshi, Senior Director and Chief Economist,

CRISIL, CCII remained relatively firm, and in fact, rose sharply to 6 per cent in December 2009, from a

low of 2.4 per cent in July 2009 - suggesting persistently high demand-side pressure on inflation -

contrary to the indication from the existing measure of core inflation. The use of CCII as a supplement

to other indicators can, therefore, help improve the timing of monetary policy actions.

In 2012, both non-food manufacturing inflation and CCII have shown a similar trend, but the decline in CCII is

sharper. CCII averaged at 5.5 per cent in January and February 2012, compared to non-food manufacturing

inflation of 6.2 per cent, indicating declining demand-side pressures on inflation. But this may not provide

enough comfort to the RBI to cut interest rates, as inflation continues to face upside risks from global crude

prices and fiscal slippage.

Besides measuring demand pressures, a reliable core inflation indicator should have a reasonable degree of

forecast accuracy to assist policymaking. CCII, being less volatile, is more suitable for forecasting than the

existing core inflation measure. According to Vidya Mahambare, Director, Economy Research, CRISIL,

Our forecast shows that CCII will drop to around 4 per cent in 2012-13 from nearly 7 per cent in 2011-

12. This decline creates an environment conducive for interest rate cuts, though its timing and quantum

will also depend on other factors such as oil prices and the governments actions towards fiscal

consolidation.

CRISIL Research will release the CCII every month using WPI data published by Ministry of Industry and

Commerce.

Contd

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Media Contacts Analytical Contacts

Mitu SamarDirector, Communications and BrandManagementCRISIL LimitedTel: +91-22- 3342 1838

Mobile: +91- 98200 61934Fax: +91-22- 3342 3001E-mail: msamar@crisil.com

Priyadarshini RoyCommunications and Brand ManagementCRISIL LimitedTel: +91-22- 3342 1812Mobile: +91- 9819742778Fax: +91-22- 3342 3001E-mail: proy@crisil.com

Dharmakirti JoshiSenior Director and Chief EconomistCRISIL LimitedTel: +91-22- 3342 8043E-mail: djoshi@crisil.com

Vidya MahambareDirector, Economy ResearchCRISIL LimitedTel: +91-22- 3342 8038E-mail: vmahambare@crisil.com

About CRISIL LimitedCRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India'sleading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leadingcorporations.

About CRISIL ResearchCRISIL Research is India's largest independent and integrated research house. We provide insights, opinions, and analysison the Indian economy, industries, capital markets and companies. We are India's most credible provider of economy andindustry research. Our industry research covers 69 sectors and is known for its rich insights and perspectives. Our analysisis supported by inputs from our network of more than 4,500 primary sources, including industry experts, industryassociations, and trade channels. We play a key role in India's fixed income markets. We are India's largest provider ofvaluations of fixed income securities, serving the mutual fund, insurance, and banking industries. We are the sole providerof debt and hybrid indices to India's mutual fund and life insurance industries. We pioneered independent equity research inIndia, and are today India's largest independent equity research house. Our defining trait is the ability to convert informationand data into expert judgements and forecasts with complete objectivity. We leverage our deep understanding of the

macroeconomy and our extensive sector coverage to provide unique insights on micro-macro and cross-sectoral linkages.We deliver our research through an innovative web-based research platform. Our talent pool comprises economists, sectorexperts, company analysts, and information management specialists.

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