RBI must now submit a report to the government on why it has failed to control inflation
With inflation remaining above the upper tolerance limit for nine consecutive months, the Reserve Bank of India (RBI) will now have to submit a report to the central government detailing the reasons for the failure to contain prices and corrective measures to curb price increases.
The Reserve Bank of India Act stipulates that in the event that the inflation target is not met for three consecutive quarters, the central bank must submit a report to the government explaining the reasons and detailing the corrective measures it will take to check the price. ascend.
It will be the first time since the beginning of the monetary policy framework which came into force in 2016 that the RBI will be asked to explain its actions in a report to the government.
In accordance with the mandate given to the Reserve Bank by the Union government, the central bank is required to ensure that retail inflation remains at 4% with a margin of 2% on either side.
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Now the secretary of the MPC, which takes into account retail price inflation while reaching fortnightly monetary policy, will now schedule a separate meeting of the rate-setting group to discuss and draft the report to be sent to the central government. under the provisions of the Reserve Bank of India Act.
The one-day meeting of MPC members will likely take place after Diwali as RBI officials are currently in the US for IMF and World Bank meetings.
Last month, RBI Governor Shaktikanta Das said the central bank considered the communication to the government for missing inflation targets as privileged communication and would not make it public.
CPI-based retail price inflation has remained above 6% since January 2022. It was 7.41% in September. The RBI Governor led the six-member Monetary Policy Committee (MPC) factors in retail inflation while deciding bi-monthly monetary policy.
If the average inflation remains above the upper tolerance level or below the lower tolerance level for three consecutive quarters, it will be considered a failure of part of the RBI to meet the inflation targeting mandate.
The Reserve Bank has been aggressively raising its policy rate since May in an effort to contain inflation. So far, it has raised the short-term lending rate by 190 basis points, taking the repo rate to a nearly three-year high of 5.9%.
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Last month, the RBI maintained its inflation projection for 2022-23 at 6.7% amid geopolitical concerns sparked by the Russian-Ukrainian war, and expected inflation to be under control at from January.
It can be noted that inflation had also exceeded target for more than three quarters during the first months of the pandemic, but a technical gap in data collection, in which data was collected without visiting mandis due to the lockdown, had helped to ensure that no such explanation had to be made by the RBI at that time.
In August 2016, the central government notified a 4% consumer price index (CPI) inflation target for the period August 5, 2016 to March 31, 2021 with an upper tolerance limit of 6% and a 2% lower tolerance limit. percent.
On March 31, 2021, the central government retained the inflation target and tolerance range for the next 5-year period – from April 1, 2021 to March 31, 2026.