With the retail inflation accelerating to 7.41 per cent in September, the RBI has missed maintaining the inflation target of four per cent within a band of plus or minus two per cent for three consecutive quarters – January to September 2022.
After the 190-basis points hike in Repo rate in the last six months, the Reserve Bank of India’s Monetary Policy Committee (MPC) will meet on November 3 to discuss the report to be submitted to the government on its failure to meet the inflation target for three quarters in a row.
With the retail inflation accelerating to 7.41 per cent in September, the RBI has missed maintaining the inflation target of four per cent within a band of plus or minus two per cent for three consecutive quarters – January to September 2022. Failure to meet the inflation target for three quarters requires the Reserve Bank to write a report to the government explaining the reasons for not achieving the target.
The six-member MPC will meet to discuss the reply, and after that, the RBI will send the report to the government. In the report, the Reserve Bank will explain the reasons for the failure to achieve the target under Clause 2, remedial actions proposed to be taken by the RBI and its estimate of the time period within which the target would be achieved pursuant to the timely implementation of the proposed remedial actions.
“In the report, RBI will write why they have missed the inflation target and what they plan to do. The possible reasons the RBI could mention for missing the inflation target for three consecutive quarters are higher global commodity prices, weak currency due to flight to safety and increase in food inflation because of adverse weather situations,” said D K Pant, Chief Economist, India Ratings and Research.
Under Section 45ZA of the RBI Act, the central government, in consultation with the RBI, determines the inflation target in terms of the consumer price index (CPI) once in five years and notifies it in the official gazette. Accordingly, on August 5, 2016, the government notified in the gazette 4 per cent CPI inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent. On March 31, 2021, the government retained the inflation target and the tolerance band for the next 5-year period – April 1, 2021 to March 31, 2026.
Although MPC is technically responsible for maintaining the inflation target, the report will be written by the RBI. However, MPC will be involved in writing the report, they said. “If I’m asked to give inputs, I will give it to the central bank,” said a member of the MPC.
The RBI has one month’s time from the date of release of September inflation data — i.e. October 12 — to send the report to the government, they added. The MPC may also discuss the liquidity situation which has dried up in the system and on the movement of the rupee, Pant added. After remaining in surplus mode for a long time, the liquidity situation in the banking system has become deficit. Between October 20 and October 26, the RBI has injected Rs 3.21 lakh crore of liquidity into the banking system.
The rupee has depreciated by over 11 per cent so far in 2022. It fell below the 83-mark for the first time on October 19. In the September monetary policy announcement, the RBI said the retail inflation to ease to 5.8 per cent, within its comfort zone, in the fourth quarter of fiscal 2022-23.
Last month, RBI Governor Shaktikanta Das said the letter to the government is a ‘privileged communication’ and the RBI will not be making it public. “It is (the letter) a privileged communication between the Reserve Bank and the Government. I cannot say whether it will be made public. From our side, we will not make it public because it is a privileged communication from the central bank to the Government,” Das had said last month.
Minutes from the September rate review, where the RBI delivered a third successive 50 bps hike, was perceived as less hawkish and pointed to a lower terminal rate. “Views of the policy committee diverged along the lines of growth, inflation, and financial stability. External members suggested that the hike cycle is nearing its end as inflation fears are soon likely to be overtaken by growth considerations, whilst the central bank representatives were more confident on growth, allowing them to focus on inflation and as well as markets stability,” said Radhika Rao, Senior Economist, DBS Bank.
One of the external members implied that there was little room for further hikes, suggesting that the real interest rate should not be in excess of 1 per cent. Another previously hawkish MPC member, Jayanth Varma called for the central bank to draw a pause to preserve growth impulses, after a cumulative 190 bps hikes in this cycle. “The only way to prevent 7 per cent inflation today would have been by aggressive tightening in the second half of 2021. Since we did not normalize interest rates till early 2022, we had already missed the bus when the Ukraine war started. Whatever we have done or may do in 2022 can only bring inflation down in mid-2023,” Varma had told this paper.
Bankers are expecting more rate hikes to bring down the inflation level. “We expect 60 bps more hikes in this fiscal year, driven by the need for price stability, to anchor inflationary expectations, and backstop rate differentials to support the currency. Into FY24, the policy committee is expected to draw a pause,” Rao said.
While scope for a more divided MPC has risen, analysts don’t subscribe to the view that this would translate into a pause or shift to a neutral stance as yet.
Goldman Sachs has forecast the retail headline inflation at 6.8 per cent, 6.8 per cent and 6.0 per cent in the next three quarters as against the RBI’s forecasts of 6.5 per cent, 5.8 per cent and 5.0 per cent. “The risks of imported inflation, however, exist due to the continuing depreciation of the rupee. In our opinion, the likelihood of a moderate hike of 35-40 bps in the repo rate in December 2022 is high given not only the inflation print but also the pressure on the currency,” said Suman Chowdhury, Chief Analytical Officer, Acuite Ratings & Research.
RBI REPORT TO GOVT
*Failure to meet the inflation target for three quarters requires the RBI to write a report to the government explaining the reasons for not achieving the target.
*The central bank has hiked Repo rate by 190 basis points to 5.90 per cent to rein in inflation
*RBI to explain the reasons for the failure to achieve the target, remedial actions proposed to be taken and its estimate of the time period within which the target would be achieved
Source- INDIAN EXPRESS
