MPC to hold additional meeting on Nov 3 as inflation stays above target

The Reserve Bank of India’s Monetary Policy Committee (MPC) will hold an additional meeting on November 3, the central bank said on Thursday. The meeting has been called to discuss what would be the RBI’s response to the government for failing to achieve its inflation mandate.

According to the Monetary Policy Framework under the RBI Act, if the central bank fails to meet the inflation target, it shall have to provide a report to the government listing the reasons for failure, remedial actions proposed to be taken and an estimate of the time-period within which inflation shall be brought back to target.

Data released earlier this month showed that average CPI inflation had remained outside the MPC’s prescribed range for three successive quarters, thereby resulting in a failure to achieve the inflation mandate.

The announcement notifying an additional meeting of the MPC has been made as per Section 45ZI (4) of the RBI Act 1934, the central bank said on Thursday.

On October 12, data showed that India’s consumer price index-based inflation was at 7.41 per cent in September 2022. The data officially marks the failure of the Reserve Bank of India’s Monetary Policy Committee to keep average inflation within the mandated 2-6 per cent target range for three successive quarters.

This is the first time that inflation has remained out of the mandated range for three successive quarters since the six-member panel started to decide the policy repo rate in October 2016.

In August 2016 the government notified that the target for CPI inflation was 4 per cent, with the upper tolerance limit set at 6 per cent and the lower limit set at 2 per cent for five years. On March 31, 2021, the government extended the same till 2026.

Accounting for the latest data, CPI inflation has been above the 4 per cent mark for 36 months.

In recent media interactions, RBI Governor Shaktikanta Das said that it would take around two years for inflation to head back towards 4 per cent. It is likely that this is the time period that the RBI will provide to the government too.

Amid speculation as to whether the contents of the MPC’s official communication to the government would be made public, Das said last month that the RBI would not publish the letter, given that the information is privileged.

So far in 2022, the MPC has hiked the repo rate by 190 basis points in order to bring inflation back to target. The repo rate is currently at 5.90 per cent.

In an interview with Business Standard earlier this month, MPC member Jayanth R Varma said that there were three reasons behind the failure to achieve the inflation target.

The first was the disruption caused by the COVID-19 pandemic, which created enormous problems for growth and inflation. The second reason cited by him was the Ukraine war, which caused inflation to jump to unacceptable levels. The third factor pointed out by Varma was the delay in raising interest rates by the MPC. According to him, the MPC should have started raising rates in mid-or-late 2021. If it had done so, the impact of the rate hikes would have started showing now, he said.