Raghuram Rajan opposes exclusion of food inflation in rate setting, cites trust concerns

Former Reserve Bank of India (RBI) Governor Raghuram Rajan expressed his disagreement with suggestions to exclude food inflation from the headline inflation while determining benchmark interest rates. He argued that doing so could damage the public’s trust in the central bank, which is tasked with managing inflation. According to Rajan, inflation targeting must reflect what consumers actually experience since it influences their perception of inflation and their future expectations.

"When I assumed office, we were targeting the producer price index (PPI), which doesn’t align with what the average consumer faces. If the RBI claims inflation is low based on PPI, but consumers experience otherwise, they won’t trust the central bank," said Rajan.

Rajan’s comments were in response to the Economic Survey 2023-24, which proposed excluding food inflation from interest rate decisions. Chief Economic Advisor V Anantha Nageswaran suggested that monetary policy has little impact on food prices, which are driven by supply factors. However, Rajan, currently a professor at Chicago Booth, countered that even though central banks can't directly affect food prices in the short term, persistently high food prices indicate a mismatch between supply and demand. This imbalance requires central banks to control inflation in other areas to stabilize overall prices.

Rajan also noted that the current weightage of food in the consumer price index, set at 46% in 2011-12, should be reassessed. India adopted an inflation-targeting framework in 2016, mandating the RBI to maintain inflation at 4%, with a 2% margin either way. The RBI projects retail inflation to be 4.5% in 2024-25, down from 5.4% in the previous year.

On another matter, Rajan responded to allegations made by the Congress party and Hindenburg Research against Securities and Exchange Board of India (Sebi) chairperson Madhabi Puri Buch. He emphasized the need for thorough investigations into such claims, adding that regulatory bodies must maintain impeccable credibility.

Addressing the issue of lateral entry into government service, Rajan advocated for fresh talent but warned that it should be managed carefully to avoid demoralizing existing officials. He suggested building consensus to ensure a smooth integration of external candidates.