Former RBI governor Raghuram Rajan has raised concerns about the potential consequences of excluding food prices from inflation calculations. Rajan argues that doing so could undermine the public's confidence in the central bank's capacity to manage the economy, particularly given the significant impact food prices have on India's inflation dynamics. As nearly half of the Consumer Price Index (CPI) basket in India is dedicated to food items, Rajan stresses that ignoring food inflation could distort the public's understanding of the country's economic health.
While some, like Chief Economic Advisor V. Anantha Nageswaran, have suggested excluding food inflation from benchmark interest rate considerations due to the limited control of monetary policy over volatile food prices, Rajan stands by the view that food inflation should not be dismissed. He believes that although central banks may not be able to immediately influence short-term food price fluctuations, monitoring sustained high food prices is essential as it could signal underlying structural issues that impact the economy. Rajan highlights the importance of considering the long-term implications of persistent food inflation on a country's ability to meet demand and produce essential goods.