Ex-RBI chief against dropping food prices from inflation estimate

Former RBI Governor Raghuram Rajan is against excluding food prices from headline inflation, as it would erode the 'great faith' of people in the RBI, which has been mandated by the government to keep inflation in check.

There has been a move to exclude food inflation while setting RBI's benchmark interest rates.

Mr Rajan said it was best that inflation targeted a basket which was what the consumer consumed because that affected the consumer's perception of inflation and ultimately inflationary expectations.

"When I came into office (as RBI Governor), we were still targeting PPI (producer price index). Now that has no bearing to what the average consumer faces. So, when the RBI says inflation is low, look at PPI, but if the consumer is facing something very different, then they do not really believe that inflation is down," he told PTI.

Mr Rajan was responding to a question on suggestions made in the Economic Survey 2023-24 for excluding food inflation while setting benchmark interest rates.

"So, if you leave out some of the most important parts of inflation and tell them that inflation is under control, but food prices are going to the roof or something else is going up, which is not included in the inflation basket, then you know, they would not have great faith in the Reserve Bank," he said.

CEA's pitch for excluding  food prices

Chief Economic Advisor V Anantha Nageswaran in the Economic Survey 2023-24 had pitched for excluding food inflation from the rate-setting calls, saying that the monetary policy has no bearing on the prices of food items, which are dictated by supply-side pressures.

Mr Rajan, who is currently a professor of finance at US-based Chicago Booth, said the argument against excluding food inflation is that 'you cannot affect it'.

"You cannot affect food prices in the short run, but if food prices stay high for a long time that does imply there are constraints on producing food relative to the demand, which means to balance that you have to bring down inflation in other areas, which is what the central banks can do," he said.

(By arrangement with livemint.com)