Coming into October, the Reserve Bank of India, for the first time in six years since it handed over the task of inflation targeting, will likely be put into a tight corner and asked to explain to the government the central bank’s failure to address the rate. Meet the inflation target as stipulated in the official inflation targeting framework adopted in the 2016 law.
Senior sources said that the explanation for the failure to manage inflation will take the form of the RBI governor’s letter to the government and that message will be discussed first at a specially convened MPC meeting in October. They added that only after the letter is discussed at the MPC meeting will it be sent to the government.
They added that Reserve Bank of India Governor Shaktikanta Das, who is also the MPC chair, will have to send this letter to the Finance Ministry in October as the retail inflation data for September is expected to be available by October 12.
It is clear that the Reserve Bank of India is facing the brunt of the inflation crisis around the world with global repercussions – after the pandemic and Russia’s invasion of Ukraine since February – in the form of exchange rate volatility, higher commodity prices and supply chain stresses exacerbating imported inflation.
Crisis around the world
The only consolation for the Reserve Bank of India is that every inflation targeting central bank across the world faces embarrassing failure due to the worldwide inflation crisis.
Meanwhile, the country’s retail inflation for September is also widely expected to be above 6 per cent – the upper range of the 2 to 6 per cent tolerance range – thus breaching average inflation above 6 per cent for three quarters. consecutively since January of this year.
Two quarters – the March 2022 quarter at 6.34 per cent and the June quarter at 7.5 per cent – have already gone through average retail inflation above 6 per cent. The inflation rate for the September quarter is expected to be around 7.1 percent. Retail inflation for July was recently at 6.71 percent, above the 4-6 percent tolerance limit for the seventh consecutive month.
“We feel that the back-to-back breakout over three quarters will happen with the July-September 2022 reading. The sources said the MPC will discuss the RBI Governor’s message at an exclusive meeting in October before sending it to the government.
“Fully Finance Minister Nirmala Sitharaman will have a call on whether or not the RBI speech should be brought up in Parliament. It will be a public document and it is up to the government to bring it to Parliament or not. It is up to the government to decide. The RBI will not release it.”
The law mandates the Governor of the Reserve Bank of India to write the letter to the government within 30 days of the date of breach of the inflation target.
The sources added that the Governor of the Reserve Bank of India is not required to present himself before Parliament, but he can appear before a parliamentary committee if asked to explain the reasons for breaching the inflation target.
The RBI was amended in 2016 to introduce the inflation targeting framework. After this step, the concept of the Monetary Policy Committee (MPC) was introduced to set policy rates in the country.
The inflation target given to the MPC for 2021-26 is 4 percent with two percentage points on either side, resulting in a tolerance range of between 2 and 6 percent. This tolerance range is the same as that introduced for the previous five years beginning in 2016.
What will the RBI GUV message say?
Reserve Bank of India Governor Shaktikanta Das is expected to address three major issues in the speech. First, the letter will give reasons for what led to the failure to achieve the goal. The second point is the measures that the MPC proposes to take to reduce inflation, and finally within the time period suggested by the Reserve Bank of India to reduce retail inflation to 4 per cent.
As for the reasons for the goal being breached, the Reserve Bank of India’s speech is expected to point to external factors beyond his control due to this persistently high inflation – the global repercussions arising from the impact of the pandemic and the continuing conflict between Russia and Ukraine.
Regarding the actions that the Reserve Bank of India can take, the indications are that the letter will show how the central bank has embarked on a policy rate tightening cycle and to what extent it can use this tool to increase the cost of money in order to control demand in the economy.
As for the timetable in which the Reserve Bank of India is proposing to cut inflation to 4 per cent, the message may refer to the second half of 2023-24 with the central bank estimating that retail inflation could drop to 5 per cent in April and June 2023.
The Reserve Bank of India has to do a disingenuous balancing act because any aggressive measures to withdraw liquidity to curb inflation should not lead to high growth sacrifices for the economy. It must balance inflation control with growth without losing focus on growth. Obviously, the priority now is to control inflation for the Reserve Bank of India, but not by getting off the growth pedal, economic watchers said.
The inflation target framework has created an overall expectation that the Reserve Bank of India will maintain inflation. The government – which has taken many supply-side measures – is also concerned that retail inflation is not getting out of control. The sources said the government may not enjoy any breach of the inflation target as this was a reform introduced by the existing exemptions.
August 28, 2022