Raghuram Rajan Strongly Condemns Excluding Food Inflation in Interest Rate Decisions | Vital Economy & Policy Update
Former RBI Governor Raghuram Rajan has voiced opposition to excluding food prices from headline inflation metrics, emphasizing that such a move could undermine public trust in the central bank. He argues that inflation targets should reflect what consumers experience to maintain confidence and accurately shape inflationary expectations. Rajan highlighted that the RBI previously targeted the Producer Price Index, which didn’t align with consumer realities, causing a disconnect.
The Economic Survey 2023-24 suggested excluding food inflation from interest rate considerations, citing the limited influence of monetary policy on food prices, dictated by supply issues. Rajan countered that while short-term impacts on food prices are minimal, persistent high prices indicate production constraints, necessitating adjustments in other inflation areas. He underscored the need to focus on the overall price level and noted the current 46% weightage of food in consumer price inflation requires updating.
India’s inflation-targeting framework mandates keeping retail inflation at 4% with a 2% margin. Currently, the RBI’s projections for 2024-25 indicate retail inflation at 4.5%, down from 5.4% the previous fiscal year.
In response to allegations against Sebi chief Madhabi Puri Buch by Hindenburg Research and Congress, Rajan stressed careful handling of such charges, advocating thorough investigations to uphold regulatory credibility. He emphasized the importance of maintaining trust in regulators for national and market benefits.
On the UPSC’s decision to revoke a call for lateral bureaucracy entry, Rajan supported bringing fresh talent into government roles while balancing existing employee incentives. He advocated for consensus-building to mitigate potential dissatisfaction.
Original Story https://www.business-standard.com/economy/news/raghuram-rajan-opposes-excluding-food-inflation-in-setting-interest-rates-124100200450_1.html
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