The recent proposal to exclude food prices from the Reserve Bank of India’s (RBI) inflation targeting framework has sparked significant debate. This idea, highlighted in the Economic Survey 2023-24, suggests that food inflation should not be included in the core inflation rate targeted by the RBI due to its volatility and the fact that it is often driven by supply-side factors rather than demand-side pressures.
The Economic Survey argues that food prices are more susceptible to supply shocks, such as poor weather conditions or disruptions in the supply chain, which cannot be effectively managed through monetary policy tools designed to control demand-induced inflation. Therefore, the Survey recommends exploring alternative measures to address the impact of rising food prices on low-income consumers, such as direct benefit transfers or specific purchase coupons.
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Source:- Business Standard
Critics of this proposal, however, emphasize the importance of including food prices in the inflation framework. They argue that in a country like India, where a significant portion of household expenditure is on food, excluding these prices from inflation targeting could lead to a disconnect between monetary policy and the economic realities faced by the population. Furthermore, high food inflation can spill over into other sectors, affecting overall economic stability.
The RBI has a current inflation target of 4%, with a tolerance band of +/- 2%. The persistent high food inflation has made it challenging to maintain this target, with food prices significantly contributing to the overall retail inflation rate, which stood at 5.08% in June 2024.
While the proposal to exclude food from the inflation framework aims to refine monetary policy and make it more effective, it faces considerable skepticism from economists and policymakers. They argue that a holistic approach, which includes all significant components of household expenditure, is crucial for accurate inflation targeting and effective economic management.
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