The Reserve Bank of India has scheduled an extra meeting of the Monetary Policy Committee (MPC) on November 3 to discuss and draft a report to be sent to the Centre on the MPC’s failure to maintain the average inflation within the target range for three consecutive quarters. This is mandated by the flexible inflation targeting framework inserted in the RBI Act in 2016 wherein the Central Government in consultation with the RBI sets the target range for the inflation once in five years. The target for Consumer Price Index inflation has been set at 4 per cent with the upper tolerance limit at 6 per cent and lower tolerance limit at 2 per cent for the period between April 1, 2021, and March 31, 2026. The CPI inflation moved above 6 per cent this January and has remained above this level until September. This means that the RBI has to explain to the Centre the reasons for failing to achieve the target, corrective actions proposed to be taken and the time-period within which the inflation is expected to be brought within the target range.
The submission of the report by the RBI must be viewed as merely procedural. Both the RBI and the Centre have been working quite zealously over the last three quarters, deploying both monetary and fiscal measures, to control the raging price rise in the economy. While it can be said that the RBI was behind the curve in hiking rates in the first four months of this calendar and that has exacerbated the price increase, the central bank has made amends since then, beginning with the unscheduled mid-meeting hike in May. The 190 basis points increase in policy rates since then, substitution of the fixed reverse repo rate with the standard deposit facility (SDF) rate, and measures to absorb excess liquidity, have helped the RBI get back on the curve. The weighted average call rate, which is the operating rate for monetary policy, is currently quite close to the SDF rate now. The rate hikes as well as liquidity tightening are expected to impact demand with a lag of few months. However, while domestic demand can be restrained through the rate action, inflation caused by supply side, such as food inflation will be more difficult to restrain.
The RBI’s report to the Centre is privileged communication between the two but the latter should put it in public domain even though the relevant law is silent on this. This will help markets and investors to understand the central bank’s thinking on inflation, and its moves, better. Inflation affects the average citizen who has the right to know what policymakers are doing about it. The Centre should ideally take the RBI’s report for what it is — an explanation of its actions — and leave it at that. Any further action on the report may not be desirable as it may undermine the RBI at a sensitive time when its focus ought to be fully on getting inflation back within the band. The right precedents need to be set as this is the first such instance after the flexible inflation targeting system was initiated in 2016.