Former Reserve Bank of India (RBI) Governor Raghuram Rajan has raised concerns over the central bank’s approach to inflation, specifically its exclusion of food prices from the core inflation calculation. He warned that this strategy could erode public trust in the RBI and mislead consumers about the real state of inflation in the economy.
Excluding Food Prices Could Undermine Trust in RBI
Rajan voiced his concerns regarding the RBI’s decision to omit food prices from the basket of goods used to set the repo rate. According to him, this could create a false sense of control over inflation, even when food prices—one of the household’s biggest concerns—remain high. The lack of inclusion might lead to a disconnect between official inflation figures and what consumers experience in their daily lives, thereby reducing their confidence in the central bank’s efforts.
In Rajan’s words, “Inflation should target a group that includes consumer goods,” as this better reflects the public’s perception and expectations about price levels. If people perceive that food costs are rising while the RBI maintains that inflation is under control, trust in the central bank could wane.
Focusing on the Producer Price Index Isn’t Enough
During his time as Governor, Rajan recalls that the focus was on the Producer Price Index (PPI), which measures price changes from the perspective of sellers. However, he now argues that PPI does not fully reflect the challenges faced by consumers.
Rajan stressed that when the RBI states that inflation is under control based on PPI, while consumer prices tell a different story, people won’t believe that inflation has decreased. He emphasized that inflation measures should be consumer-focused, as they have a direct impact on everyday lives.
Urgent Steps Needed to Address Food Inflation
One of Rajan’s key points is the need for urgent steps to control rising food prices. He acknowledged that monetary policy may have little short-term impact on food costs, which are often influenced by supply-side factors. However, he cautioned that if food prices remain elevated over a prolonged period, it suggests deeper structural issues in food production and supply.
Rajan advised that in such cases, the RBI must act by controlling inflation in other areas, as persistently high food prices can’t be ignored. Balancing inflation across sectors, he argues, is crucial to maintaining public confidence in the central bank.
Economic Survey Sparks Debate on Food Inflation
Rajan’s comments were made in response to a recent suggestion in the Economic Survey 2023-24, which proposed excluding food inflation when setting interest rates. Chief Economic Advisor V. Anantha Nageswaran argued that monetary policy has limited control over food prices since they are largely influenced by supply chain issues.
However, Rajan disagrees with this approach. He believes that even if food prices are outside the control of monetary policy, excluding them from inflation measurements could distort the broader inflation picture. Ultimately, Rajan asserts, consumers are primarily concerned with the prices they pay at the grocery store, not abstract economic indices.
SEBI’s Credibility Under Scrutiny
In addition to his comments on inflation, Rajan also addressed recent controversies surrounding SEBI Chief Madhabi Puri Buch. Responding to allegations of inappropriate behavior and conflict of interest, Rajan emphasized the importance of maintaining trust in market regulators. He suggested that Buch must address the accusations point by point to clear any doubts, ensuring that the regulator’s credibility remains intact.
Rajan’s comments come after Madhabi Puri Buch and her husband refuted allegations made by Hindenburg Research and the Congress Party, calling them baseless and politically motivated. Rajan noted that while anyone can make allegations, regulators like SEBI need to remain transparent and above reproach in their responses.
