## Poonam Gupta Takes Over as Deputy Governor of the RBI
Poonam Gupta officially took on her role as the new deputy governor of the Reserve Bank of India on Friday. She will participate in the monetary policy committee amid an ongoing cycle of interest rate cuts.
## Focus on Inflation Targeting
Gupta’s previous work showcases her commitment to enhancing the structure and execution of India’s inflation targeting framework. In collaboration with Barry Eichengreen, she highlighted that the effective representation of food in India’s consumer price index should decrease over time as incomes rise. This adjustment could potentially alleviate some concerns regarding the inflation targeting system. Their analysis suggests that the appropriate food weight, considering current per capita income, is approximately 40%, with expectations of a decline to 30% in the next ten years.
The findings of their paper indicate that since the introduction of inflation targeting, the Reserve Bank of India has not adopted a more aggressive or reactive stance. Instead, the outcomes have shown improvement, marked by reduced and more stable inflation, better-aligned inflation expectations, and enhanced monetary transmission. The authors caution against implementing significant changes to the framework, such as expanding the mandate, prioritizing core inflation over headline inflation, or modifying the tolerance band. They advocate for a revision of the food weight in the CPI.
## Upcoming Changes in CPI Series
The Ministry of Statistics is set to launch a new series of the consumer price index in February of next year, informed by recent household consumption data. This new series is anticipated to reduce the food weight within the inflation basket.
## Impact of Food-Price Inflation
In their analysis, Gupta and Eichengreen pointed out that food-price inflation, which is often reflected in headline inflation, also influences core inflation. They emphasize that this connection should not be overlooked, even if the RBI does not need to react to every fluctuation in food prices. Ignoring a prolonged disparity in food inflation from the target could lead to adverse effects, they caution.
## Exchange Rate Policy Insights
In March, Gupta expressed that India should permit greater flexibility in the movement of the rupee while preventing significant appreciation or volatility. In her column for The Economic Times, she suggested that the RBI should rebuild foreign exchange reserves when circumstances permit and consider a measured depreciation strategy alongside reserve utilization during external shocks.
She noted that the RBI has shifted its focus toward managing currency movements using reserves while limiting depreciation. Gupta proposed that this approach should be reassessed to better handle external shocks. She also highlighted the need to promote long-term capital inflows, such as foreign direct investment, over unstable short-term flows, and advised against the implementation of capital controls. Additionally, she recommended re-evaluating bilateral swap lines, particularly with Japan, and exploring initiatives to attract funding from the diaspora.
## Global Trade and Currency Considerations
In light of global trade tensions, Gupta has argued that a weaker currency could be advantageous for India by enhancing export competitiveness.
## Analysis of Public Finances
Gupta has also contributed to discussions on public finances. In another paper co-authored with Eichengreen, she examined India’s federal debt and advocated for reforms aimed at improving fiscal discipline at the state level. The paper reveals that one-third of India’s public debt originates from states, with significant variations in debt levels—ranging from less than 20% of state GDP in Odisha, Maharashtra, and Gujarat to nearly 50% in Punjab.
Over the last decade, many of India’s larger states have increased their debt-to-GDP ratios by over 10 percentage points. Conversely, some have demonstrated fiscal prudence or only moderate increases in debt. The authors predict that under a business-as-usual scenario, most states will continue to accumulate more debt, worsening the disparity between highly indebted and less indebted states, thereby restricting expenditure flexibility for those with higher debt.
## Gupta’s Background
Before her current appointment, Gupta served as the Director General at the National Council of Applied Economic Research. She brings a wealth of research experience in inflation targeting, monetary policy, exchange rate management, and federal fiscal issues to her new position at the RBI.
