New WPI index broad-based, indicative of richer India

After over a decade of India reporting wholesale inflation on the basis of a basket of 435 commodities, the new WPI series will came into effect from September 14. The new series increases the items under coverage by nearly 50% and promises to provide a more accurate index for calculating the inflation rate. The government has also revised the base year for wholesale price index (WPI) inflation to 2004/05 from 1993/94 and increased the number of components by one-third.

The new data series will have about 676 items and about 5,482 price quotations compared to the 435 items and 1918 quotations currently. This means that the headline inflation number derived from this index will be more representative of the state of the economy. The new series is broad based and is expected to smoothen index number. About 200 items have been either dropped, amended or regrouped in the new series.

The government has reduced the weight of primary articles to 20.118% in the wholesale price index from 22.0253% and increased the weight of manufactured products to 64.972 from 63.749, reflecting a broader shift in the economy.

There is a substantial increase in the number of items in the basket of manufactured products. In the new series, there would be 555 items compared with 318 items at present.

Ready-made food, computer stationary, dish antenna, VCDs, crude petroleum and computers would also be part of the new series.

Under primary article group of the new WPI, there would be 102 items as against 98 at present while fuel and power category would remain unchanged with 19 items.

The government is also working on a service price index, which would measures the variation in prices of services. This carries immense importance as the services sector contributes around 57% of the country’s gross domestic product. Work is also going on to provide an index for sectors such as road transport, ports, aviation, telecom, post and telegraph and banking. By this fiscal year end, two indices namely on financial services and trade and transport should be released.

The new index is welcome because it is reflective of new India. It is also more broad based, three times the number of price quotes compared to the previous one. It is also indicative of a slightly richer India. Food is getting less representation, soft drinks, alcohol even gold jewellery is getting more representation so that indicates the country is getting richer. This new index could be a little more volatile. It is more dependant on commodities. We are seeing a bigger weightage for basic chemicals, inorganic or organic chemicals also metallic minerasl all these are commoditized items and they tend to be a little more volatile.

The other change is that a lot of consumer durable goods have come in. Inclusion of such large number of consumer durables also indicates that the line between CPI and WPI is blurring because these are strictly not wholesale items. They should not be there perhaps in a wholesale price index.

The biggest problem with the new index will be that it is a serious break with the old index. 

Basel III eases Asia banks capital raising fears

Global regulators announced new capital rules that weren't as harsh as some had expected. Sentiment toward lenders also improved as the rules, which won't be introduced for years, took away a key element of uncertainty by easing any immediate pressure on banks to sell new shares to raise capital.

On Sunday, global regulators agreed to new capital rules for the sector. The new regulations will require a total common equity ratio of 7% for banks.

The minimum common equity level requirement was lifted to 4.5%, from 2%, and banks will also now be required to hold a capital conservation buffer of 2.5% "to withstand future periods of stress," the group of governors and supervisory heads in the Basel Committee on Banking Supervision announced.

The new rules requiring higher capital levels for lenders are designed to provide a cushion to absorb losses and thus help prevent the kind of problems seen in the recent global financial crisis.

Banks will be required to have a tier 1 capital ratio of 6%, up from the current 4% level. The key element of tier 1 capital is common shareholder funds and disclosed reserves or retained earnings, according to the Basel Committee.

Although the sector's capital requirements have increased, the rise wasn't as bad as some had expected and banks will have time to introduce the new rules, with higher capital levels required to be in place by the start of 2019.

Banks have to reach the minimum tier-1 ratio level of 4.5% by 2015 while the capital conservation buffer has to be fully in place by Jan. 1, 2018.

Most banks across the rest of Asia already have capital levels well above the minimum levels set.

This contrasts with Europe where the new rules are likely to cause more pain. Top German lender Deutsche Bank is seeking a headstart on its rivals by announcing plans to raise almost 10 billion euros to bolster its capital, and more banks in Germany, Spain, France, Japan and elsewhere are likely to follow suit to meet the new standards.

The Basel III agreement was reached in Switzerland by central bank governors and top supervisors from 27 countries, after a year of horse-trading and lobbying that involved banks and governments seeking to protect their national interests.

Along with the capital standards, Basel III includes a range of reforms agreed earlier this year to reduce risk-taking by banks, including rules on how liquid banks' assets must be and how banks must treat tax assets on their books. Some changes were watered down in July after strenuous lobbying by banks.

Still, the new capital regulations which will be presented to the Group of 20 leaders summit in November for approval, remove a key area of investor uncertainty on the sector overall.