RBI's MPC meets to draft letter to govt on missing inflation target

The Reserve Bank of India’s (RBI’s) Monetary Policy Committee on Thursday held a separate meeting to deliberate on and draft a report to the government following the first-ever instance of the panel’s failure to achieve its inflation target.

“A separate meeting of the Monetary Policy Committee (MPC) was held on November 3, 2022 to discuss and draft the report to be sent to the Government by the Reserve Bank of India (RBI) under the provisions of Section 45ZN of the RBI Act, 1934 and Regulation 7 of RBI MPC and Monetary Policy Process Regulations, 2016,” the central bank said in a statement.

The meeting was chaired by RBI Governor Shaktikanta Das and attended by all the other five members of the rate setting panel, the statement said.

According to the provisions of the Act, the MPC is deemed to have failed on its mandate if average Consumer Price Index-based inflation remains out of the 2-6 per cent tolerance band for three successive quarters. Taking into account the 7.4 per cent inflation print for September, the price gauge has been out of the prescribed range for nine straight months.

Headline retail inflation has remained above the MPC’s 4 per cent target for 36 months. The Act stipulates that in its report, the RBI must explain the reasons behind inflation failure, the remedial steps to be taken and a timeline for consumer prices to return to the target. Recent comments by the RBI management as well as publications by the central bank suggest that it will take two years for inflation to head back to 4 per cent.

Amid rumours on whether the MPC’s additional meeting could have been followed by a rate action, the RBI put the speculation to rest by communicating on its website that the meeting was about the letter to the Centre.

Das said on Wednesday that he did not have the privilege or authority to release the contents of the letter immediately but there are indications that the MPC is unlikely to say anything radically different from the central bank’s recent public commentary. A major reason that is likely to be cited for inflation failure is the surge in global commodity prices caused by the Ukraine war.

“24th February completely changed the entire picture,” Das said on Wednesday, referring to the day Russia invaded Ukraine.

With the MPC having announced 190-bps rate hikes in a relatively short span of time — the hiking cycle began in May — the committee is likely to relay to the government that it would prefer to see the impact of the steps play out. “I think there’s a case to be made for further tightening but how much tightening and at what intensity — that is what I think needs to be debated. It depends on how the RBI sees the monetary conditions that have tightened very significantly in the last couple of months, especially the liquidity conditions,” Rahul Bajoria, chief India economist at Barclays, said.

“I think the US Fed’s hikes will be one factor, not the main one. Ultimately, the RBI will be guided by growth and inflation for India itself. The RBI may take a pause after that after the next rate hike in December which could be 35 bps,” he said.

Within the MPC, differences in opinion have begun to emerge. In the October policy meeting, two external members — Ashima Goyal and Jayanth Varma — disagreed with the other members. Goyal preferred a smaller rate hike, while Varma dissented on the stance of withdrawal of accommodation. Both external members also said the MPC should pause now to see how the impacts on the 190-bps rate hike plays out.

Varma subsequently said in an interview to Business Standard that the rate hike cycle should have started six months before it did. At present, though, it would be appropriate for the MPC to wait for the effects of the 190 bps of rate hikes to play out, he said.

The next meeting of the MPC is scheduled for December 5-7.