The Reserve Bank of India will call a special meeting of its Monetary Policy Committee (MPC) after October 12 to discuss a report it will have to submit to the Union government explaining the reasons for the average retail inflation remaining above the upper tolerance limit of 6 per cent for three consecutive quarters.
The Union government, in consultation with the RBI, fixes the inflation target for the central bank every five years. It had fixed it at 4 per cent plus/ minus 2 per cent (upper limit 6 per cent, lower limit 2 per cent) for the period August 5, 2016 to March 31, 2021, and retained it for the next five years ending March 31, 2026.
With the political class over years realising that inflation or price rise hurts the poorest the most and also adversely impacts growth in the long run, the Union government decided to provide a statutory basis for implementing inflation targets by the RBI. A monetary policy framework was signed between then RBI Governor Raghuram Rajan (on behalf of the RBI) and then Finance Secretary Rajiv Mehrishi (on behalf of the President) on February 20, 2015. The RBI Act, 1934, was amended in May 2016, giving effect to this framework agreement.
The framework agreement requires the RBI to submit a report to the Union government if it is in breach of the inflation targets for three consecutive quarters. In eight years, this will be the first time the RBI would have let retail inflation slip beyond the upper tolerance limit of 6 per cent for three straight quarters.
The average retail inflation in January-March 2022 and April-June 2022, according to data released by the National Statistics Office, was 6.34 per cent and 7.28 per cent, respectively. In July this year, it stood at 6.71 per cent. The data for August and September is scheduled to be released on September 12 and October 12, respectively.
While the RBI will be fully informed about retail inflation for all three quarters only by October 12, the CPI-based inflation is expected to remain above the 6 per cent upper limit in the July-September quarter too. In its August 5, 2022, monetary policy statement, the RBI’s retail inflation outlook for July-September was 7.1 per cent. For the next two quarters, it was 6.4 per cent (October-December 2022) and 5.8 per cent (January-March 2023), respectively.
Managing inflation is key
The RBI has multiple roles, but it’s accountable for one primary objective — keeping inflation within a flexible range of 2 per cent to 6 per cent. If it fails, the RBI Act, through the monetary policy framework, requires it to explain why it couldn’t stick to the target, what action it proposes to remedy, and by when it can set things right.
Upon failing to meet the inflation target, the RBI, sources said, would have to state the reasons for failure to achieve the target, propose remedial actions to bring it down to 4 per cent, and also provide an estimate of the time-period within which the target would be achieved. These would be presented in a report to the Union Ministry of Finance.
The sources said, it would be up to the government to make the RBI report public. The special meeting of the MPC would discuss the RBI report before it is submitted. The MPC, chaired by Governor Shaktikanta Das, has five more members. They are Michael D Patra, Deputy Governor (RBI), Rajiv Rajan, Ashima Goyal, Shashank Bhide and Jayanth Varma.