RBI's MPC To Write Letter To Govt Explaining Why It Missed Inflation Target

This is the first time since 2016 the RBI is writing such a letter to the Centre after the country adopted a flexible inflation-targeting arrangement

The Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) will write a letter to the government on Thursday explaining why they failed to keep inflation within the prescribed band of 2-6 per cent.

India’s retail inflation has stayed above the upper band of the RBI’s target level of 2-6 per cent in each month this year. Despite a total of 190 basis points of interest rate increases since May, retail inflation edged up to 7.4 per cent in September, continuing its streak of nine consecutive months. The central bank’s forecasts suggest price pressures will remain on the higher side for the rest of the year.

This is the first time the RBI is writing such a letter to the Centre after the country adopted a flexible inflation-targeting arrangement. In 2016, they formed a committee to set interest rates within the prescribed limit. In the letter, the MPC shall detail its measures to bring down inflation.

The off-cycle meeting has caused some worry among bond investors, especially since its comes hours after the Federal Reserve meet. The US Fed on Wednesday hiked interest rates by 75 basis points for a fourth time in a row to tame the surging inflation.

The MPC meeting was called under two sections. Of this, Section 45ZN of the RBI Act, 1934, refers to the failure to adhere to the inflation target. It comes into play as the central bank fails to meet the inflation target.

If such case arises, the banking regulator has to write a report to the government listing the reasons for its failure to achieve the inflation target, remedial measures to be taken, and an estimate of the period within which the inflation target will be achieved.

In the second provision of Regulation 7 of the RBI Monetary Policy Committee and Monetary Policy Process Regulation, 2016, it says that the secretary to the committee shall schedule a separate meeting as part of the normal policy process to discuss and draft the report to be sent to the government under the provisions of Section 45ZN of the Act. The report needs to be sent to the government within one month of the date on which the RBI has failed to meet the inflation target.

According to a survey by Bloomberg economists, experts don’t expect a rate action.

RBI Governor Shaktikanta Das in a meeting on Wednesday said Indian economy is growing steadily, drawing strength from its macroeconomic fundamentals and buffers. Das, while speaking at the annual FIBAC conference of bankers, defended the RBI’s handling of the inflationary issue, saying that taking action on inflation too soon would have had a significant negative impact on the economy and people.

“As per IMF, India is slated to be one of the fastest-growing major economies. We're monitoring inflation trends. Our constant endeavour is to keep 'Arjuna’s eye' on inflation,” Das added.