Jayanth Rama Varma — an academic whose four-year term as an external member on the monetary policy committee comes to an end in early October — said over the past year or so, “food inflation has consisted largely of transient spikes that do not spill over into core inflation.”
The RBI was sacrificing its growth goals by keeping policy too tight, said Varma, who has voted for rate cuts in the past four meetings. A reduction in the benchmark rate was “long overdue,” he said.
The RBI under Das has kept its policy rate unchanged at 6.5% for more than 18 months now, concerned that higher food prices will spill over to general prices in the economy.
“I am not suggesting that the MPC should ignore food inflation,” Varma said in an emailed response to questions. However, high interest rates at a time when inflation is moderating is “unnecessary” and can lead to an “excessive growth sacrifice,” he said.
The RBI’s mandate is to maintain price stability and growth, and with inflation trending down toward the 4% target, “the need has arisen for the MPC to consider its dual mandate more seriously,” Varma said.Core inflation, which excludes the volatile food and fuel components, weakened to record low levels of 3.1% earlier this year and has remained relatively subdued since then. That suggests very little cost-push pressure on inflation.Economic theory suggests that “in the presence of a credible inflation targeting regime and reasonably restrictive monetary policy, food shocks will only lead to a change in relative prices, and would not spill over to core inflation,” Varma said.
The RBI’s targeted measure is the headline inflation rate, not core. While the headline measure dipped below 4% in July, it’s likely to pick up again in coming months because of food prices.
Varma’s comments come on the back of a growing debate about food prices and their impact on monetary policy. A top government official recently argued that the RBI should target an inflation measure that excludes food. The RBI’s inflation targeting framework is up for review in March 2026.
The government has also begun a process of revising its consumer price index, with the possibility of a sharp cut in the weighting of food from 46%.
Varma and Ashima Goyal, another external MPC member, were the only two policymakers on the six-member panel to vote for rate cuts in August. The other external member on the MPC, Shashanka Bhide, voted for no change.
A government-appointed committee is in the process of selecting new external MPC members ahead of the next rate decision scheduled for Oct. 9.
Bhide said by email that the recent moderation in inflation was because of central bank policies and favorable base effects. He argued that “sustained period of moderate inflation is also necessary for high long-term growth.