Reserve Bank To Clarify Why It Failed To Tame Rising Inflation Since January

As inflation stayed above the upper tolerance band for nine straight months, the RBI in a report to the Centre will explain the reasons and detail the remedial actions it will take to check price rise

The Reserve Bank of India (RBI) will submit a report to the government explaining reasons for the failure to contain prices and remedial measures to rein in the price rise, as inflation stayed above the upper tolerance band of the central bank for nine straight months.

The Reserve Bank of India Act mandates that in the case of the inflation target not being met for three consecutive quarters, the RBI has to submit a report to the Centre clarifying the reasons and detail the remedial actions it will be taking to check the price rise, the PTI reported. According to the report, this will be the first time since the onset of the Monetary Policy Framework which came into effect in 2016 that the banking regulator will be made to explain its actions in a report to the government.

As per the mandate given to the RBI by the Union Government, the central bank is needed to ensure retail inflation remains at 4 per cent with a margin of 2 per cent on either side.

The Secretary to the MPC, which factors in retail inflation while arriving at bi-monthly monetary policy, will now schedule a separate meeting of the rate-setting panel to discuss and draft the report to be sent to the government under the provisions of the Reserve Bank of India Act.

As the RBI functionaries are currently in the US for IMF and World Bank meetings, the one-day meeting of MPC members is likely to take place after Diwali.

RBI Governor Shaktikanta Das last month had said the central bank considers the communication to the government for missing the inflation targets as privileged communication and will not be making it public.

The retail inflation based on consumer price index (CPI) has remained above 6 per cent since January 2022 and was clocked 7.41 per cent in September. The six-member Monetary Policy Committee (MPC), headed by the governor, factors in retail inflation, while deciding the bi-monthly monetary policy.

The RBI has been aggressively raising the key interest rate since May in a bid to tame inflation. So far, it has raised the short-term lending rate by 190 basis points taking the repo rate to a nearly three-year high of 5.9 per cent.

Last month, the RBI retained its inflation projection for 2022-23 at 6.7 per cent amid geopolitical concerns triggered by Russia-Ukraine war, and expected inflation to be under control from January.

It may be noted that inflation had overshot the target for over three quarters during the initial months of the pandemic as well, but a technical shortcoming in the data collection, wherein data was collected without visiting the mandis because of the lockdown, had helped ensure that no such explanation has to be done by the RBI at that time.

In August 2016, the central government notified 4 per cent CPI inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance level of 6 per cent and the lower tolerance level of 2 per cent. On March 31, 2021, the government retained the inflation target and the tolerance band for the next 5-year period – April 1, 2021 to March 31, 2026.