Former RBI Governor Raghuram Rajan has expressed his opposition to the idea of excluding food inflation when determining benchmark interest rates. He believes that doing so would undermine the public’s trust in the central bank, which is tasked by the government with controlling inflation. Rajan also mentioned that it’s preferable for inflation to focus on a collection of items that consumers buy, as this influences their view of inflation and their expectations about it. “When I started my role, we were still aiming for the PPI (producer price index).” This does not relate to the experiences of the average consumer. “When the RBI claims that inflation is low, we should consider the PPI, but if the consumer is experiencing a different reality, they are likely skeptical about the decrease in inflation,” he stated in an interview with PTI. Rajan was addressing a query regarding proposals in the Economic Survey 4.53-24 to exclude food inflation from the criteria for determining benchmark interest rates. GoI ‘vs’ RBI, a polite policy debate. “If you omit some crucial aspects of inflation and assert that it’s under control while food prices are skyrocketing or other items are increasing that aren’t part of the inflation measurement, it undermines confidence in the Reserve Bank,” he stated. Chief Economic Advisor V Anantha Nageswaran, in the Economic Survey 2023-24, advocated for removing food inflation from monetary policy decisions, arguing that monetary policy does not influence food prices, which are driven by supply-side factors. Rajan, who currently teaches finance at Chicago Booth in the U.S., noted that the case against excluding food inflation is that ‘you cannot influence it.’ “While you can’t change food prices in the short term, if they remain high for an extended period, it indicates production constraints relative to demand. This means that to achieve balance, inflation in other areas must be reduced, which is within the capabilities of central banks,” the respected economist commented. SEBI board meeting: Controversy regarding Madhabi Buch, stricter F&O regulations, and MF-Lite are key topics on the agenda. Rajan states that the RBI has the ability to target the overall price level. The current weight of food in the total consumer price inflation, which is at 46 percent, was established in 2011-12 and should be reviewed. In 2016, India implemented an inflation-targeting framework that requires the Reserve Bank of India (RBI) to maintain retail inflation at 4 percent, with a permissible variation of 2 percent above or below that rate. The RBI sets the benchmark policy rates every two months based on changes in the consumer price index, which encompasses food, fuel, manufactured goods, and some services. Raghuram Rajan stated that promoting labour-intensive industries is essential for creating more jobs.
