RBI MPC Member Nagesh Kumar Advocates Two Inflation Rates For Better Policy-Making

India introduced the inflation-targeting framework in 2016 under which the RBI is mandated to keep retail inflation at 4 per cent.

New Delhi:RBI Monetary Policy Committee member Nagesh Kumar has suggested that there should be two inflation rates - one including food prices and the other without food prices - so that relevant rates could be taken into account for policymaking.

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.

"I think there is a healthy debate on what should be the target, whether overall headline inflation rate or inflation rate excluding the food products, which are, you know, very seriously affected by seasonal demand, supply mismatch," Kumar told PTI while responding to a question on suggestions made in the Economic Survey for excluding food inflation while setting benchmark interest rates.

The weightage of food in the overall consumer price inflation, which stands at 46 per cent, was done in 2011-12 and needs to be revisited.

"I think we should have two inflation rates, one including food inflation and one without food inflation... so the relevant rate could be considered for what, which particular policy parameter one is looking at," he said.

India introduced the inflation-targeting framework in 2016 under which the Reserve Bank of India (RBI) is mandated to keep retail inflation at 4 per cent, with a margin of 2 per cent on either side.

The benchmark policy rates are decided bi-monthly by the RBI on the basis of movement in the consumer price index, which includes food, fuel, manufactured goods and select services.

Responding to a question on high food prices, Kumar said retail inflation slowed to a four-month low of 5.22 per cent in December. "A large part of this 5.2 per cent is because of the food prices inflation, and then also a seasonal mismatch of vegetable prices...And that corrects by itself, when more supplies come to the mandis, we should see inflation being restrained much more," Kumar added.

On India's current macroeconomic situation, he said the slowdown in India's economic growth to a seven-quarter low of 5.4 per cent in the second quarter was a temporary, transient kind of slowdown.

According to Kumar, it reflected the lag effect of the very strong squeeze in the capex of the government in the first quarter because of the election code of conduct, but the capex started to pick up in the second quarter.

"We expect strong growth in the second half of the year, and overall, I think we should be making up somewhere around 6.5 per cent or 6.6 per cent," he said.

Responding to a question on the outlook of the Indian economy in FY26, Kumar said the performance of the Indian economy will be slightly better next fiscal year than this year.

"My growth estimate would be somewhere between 6.6 to 6.8 per cent and that is because a lot of investment which has grown into different sectors, especially, PLI investments and all that, should begin to show the results which will be adding up to the next financial year," he said.

Kumar also expressed hope that the momentum in the public investment which the finance minister displayed in the past two fiscal years will be maintained. "And if that is sustained, that will also help boost the economic growth in the coming year," the eminent economist said.

India's economic growth rate is estimated to slip to a four-year low of 6.4 per cent in 2024-25, mainly on account of poor showing by the manufacturing and services sector, according to government data.

The economic growth slowed to a seven-quarter low of 5.4 per cent during the July-September period. It was 6.7 per cent in the first quarter (April-June).

Asked why India's private investment has been sluggish, Kumar said private investment should be doing better than it is doing so far.

"And I think after the uncertainties of the election are through, we have a stable government at the Centre, and the NDA 3.0 is taking the momentum of reforms forward, this should crowd in more private investment," he noted.

Kumar expressed hope that private investments will begin to come in and crowd in very robustly in the coming year as most of the things which one (investor) was waiting and watching for, would be out of their way.

Asked whether he sees interest rate reduction as a sort of solution to boost private investment, he said interest rates certainly are reflected in the cost of capital, and so certainly they will be one of the factors.

"But there are many factors, I mean, macro performance of the economy, macro fundamentals of the economy," Kumar said, adding that all of these are quite robust for the economy.

Noting that the Indian economy continues to be the fastest-growing economy among the major economies of the world, he said, "We need to project India's story a bit more so to get more foreign direct investment to the country than we have been getting."