Raghuram Rajan Opposes Excluding Food Prices from Inflation Calculations

Raghuram Rajan said that inflation targeting should reflect a basket of goods consumed by the average consumer, as this shapes public perceptions of inflation

Rajan's comments came in response to suggestions made in the Economic Survey 2023-24, which proposed excluding food inflation when setting interest rates.

Source : PTI

Former Reserve Bank of India (RBI) Governor Raghuram Rajan has voiced strong opposition to the idea of excluding food prices from headline inflation calculations while setting benchmark interest rates. Rajan argued that such a move would undermine public confidence in the central bank, which is mandated by the government to control inflation.

Speaking on the matter, Rajan said that inflation targeting should reflect a basket of goods consumed by the average consumer, as this shapes public perceptions of inflation. He noted, "When I took office, we were still targeting the Producer Price Index (PPI), which has little relevance to what the average consumer experiences. If the RBI says inflation is low, but consumers face higher prices, they will not believe inflation is down."

Rajan's comments came in response to suggestions made in the Economic Survey 2023-24, which proposed excluding food inflation when setting interest rates. Chief Economic Advisor V Anantha Nageswaran argued that food prices are driven by supply-side pressures, making them less responsive to monetary policy.

He, however, contended that while food prices may not be immediately influenced by interest rates, sustained high food costs indicate broader supply-demand imbalances. In such cases, he said, central banks should manage inflation in other areas to maintain overall price stability. He also called for a reassessment of the current weightage of food in the Consumer Price Index (CPI), which stands at 46 per cent, based on 2011-12 data.

India adopted an inflation-targeting framework in 2016, tasking the RBI with keeping retail inflation at 4 per cent, with a 2 per cent margin on either side. The central bank bases its bi-monthly rate decisions on the movement of CPI, which includes food, fuel, manufactured goods, and select services. The RBI has projected retail inflation for 2024-25 at 4.5 per cent, down from 5.4 per cent in the previous fiscal year.

Rajan on Allegations Against SEBI Chief

Rajan also commented on the recent allegations against Securities and Exchange Board of India (SEBI) chief Madhabi Puri Buch, made by US-based short seller Hindenburg Research and India's Congress party. He urged caution, stating that while anyone can make allegations, it's crucial for the regulator to be above reproach. "If there has been a thorough investigation into these allegations, the regulator must address them point by point," Rajan said, stressing the importance of maintaining the credibility of regulators for the benefit of the markets and the nation.

Last month, SEBI chairperson Madhabi Puri Buch and her husband denied the allegations of impropriety and conflict of interest, calling them "false, malicious, and motivated."

On UPSC’s Lateral Entry Decision

Rajan also weighed in on the Union Public Service Commission's (UPSC) recent decision to withdraw its advertisement seeking lateral entry into the bureaucracy. He expressed support for introducing fresh talent into the government but cautioned against disrupting existing promotion opportunities. "It’s important to build consensus and not upset the system while bringing in new talent," he remarked, highlighting the need for a balanced approach.

While Rajan is not opposed to lateral entry, he believes it must be implemented carefully to avoid causing resentment within the bureaucracy.