[ad_1]
On October 27, the Reserve Bank of India (RBI) announced that the Monetary Policy Committee (MPC) will organise an additional meeting on November 3 to discuss why the bank has failed to keep inflation under the tolerance limit of 2-6 per cent for three consecutive quarters and write a letter to the central government around it.
“Under the provisions of Section 45ZN of the Reserve Bank of India (RBI) Act 1934, read along with the Gazette notifications S.O.2215(E) dated June 27, 2016, and S.O.1422(E) dated March 31, 2021, and the Regulation 7 of the RBI Monetary Policy Committee (MPC) and Monetary Policy Process Regulation, 2016, an additional meeting of the MPC is being scheduled on November 3, 2022,” it announced.
Under Section 45ZN of the RBI Act, 1934, the central bank is required to write a letter to the Centre if it fails to maintain the inflation target. The contents of the letter are not made public.
“Where the Bank fails to meet the inflation target, it shall set out in a report to the central government,” the section reads.
The letter must mention, “the reasons for failure to achieve the inflation target”, “remedial actions proposed to be taken by the Bank” and “an estimate of the time period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions”.
“RBI is expected to dwell upon the stance it had taken in favour of growth and revival of the economy in the general tradeoff involved between growth and inflation in difficult times,” Jyoti Prakash Gadia, managing director at financial advisory firm Resurgent India told Business Standard.
Also read: RBI’s MPC to explain first inflation miss since 2016 to government today
In September, India’s retail inflation was recorded at 7.4 per cent. In the first quarter of the current calendar year, the inflation averaged 6.3 per cent. In the second quarter, between April and June, the inflation was 7.3 per cent. In the third quarter, ending September, the inflation was 7 per cent.
The next MPC meeting was supposed to take place between December 5 and 7.
What reasons might the RBI mention?
There are several reasons for the ongoing phase of high inflation around the globe. Ever since the outbreak of the Covid-19 pandemic, inflation has remained high in several countries. Supply chain constraints, low consumer confidence and shrinking incomes were the main reasons why the prices remained high.
In 2022, however, the war in Ukraine since February has been a major factor in accentuating the situation. Prices, especially of commodities, rose manifold pushing the prices of food and other essentials up.
Most of the central banks and agencies have signalled that major economies might see a slowdown, or even a recession, in the second half of FY23.
“RBI will try to justify that it was not behind the curve or unduly late in initiating steps against inflation. RBI is expected to bring forth the argument that inflation became high primarily because of supply-side constraints and because of the unexpected geopolitical situation arising out of the Ukraine war, in the absence of which, apparently the situation would have been under control,” Gadia said.
“RBI will bring out the fact that the unprecedented situation arising out COVID pandemic demanded exceptional measures and therefore, its consistent accommodative stance and a sharp reduction in repo rates was the need of the hour,” he added.
What remedy is the RBI likely to mention?
According to experts, interest rates will be the primary tool for RBI.
“Interest rate will be the primary monetary policy tool that the rbi will adopt to manage inflation. However, the growth impact it will potentially have will be countered by other measures such as liquidity support and smoother monetary transmissions through rapid payment innovations. Regulatory forbearance won’t be a support that will be extended and in my view, the industry should also not seek it,” Vivek Iyer, partner, FS- Risk, at consultancy firm Grant Thornton Bharat said.
When is inflation expected to fall in line?
In the September MPC announcement, governor Shaktikanta Das said, “The inflation projection is retained at 6.7 per cent in 2022-23, with Q2 at 7.1 per cent, Q3 at 6.5 per cent, and Q4 at 5.8 per cent, with risks evenly balanced. CPI inflation is projected to further reduce to 5.0 per cent in Q1FY24”.
However, in Thursday’s letter, the bank may specify a different projection.
[ad_2]
Source link
