RBI To Hold Special MPC Meet on Inflation: Why in News?
- The Reserve Bank on October 27, 2022 called a special meeting of the Monetary Policy Committee (MPC) on November 3 to prepare a report on its failure to keep retail inflation below 6 percent for three consecutive quarters.
- This is for the first time since its constitution in 2016 that a six-member interest rate-setting body is meeting for such a purpose
RBI To Hold Special MPC Meet on Inflation: Background
- Inflation in India has remained above the upper tolerance limit of 6 percent for nine consecutive months or three quarters.
- The consumer price-based index (CPI), or retail inflation, accelerated to 7.4 percent in September from 7 percent in August.
- CPI has been above the Reserve Bank’s tolerance band of 2-6 percent since January 2022, resulting in a 190 basis points (bps) increase in repo rate since May this year.
- Retail inflation has consistently been above the upper bound of 6 per cent since January and the RBI has hiked the policy repo by 190 basis points this year to tackle elevated inflation.
RBI To Hold Special MPC Meet on Inflation: Relevant Provisions under RBI Act
- Under the provisions of Section 45ZN of the Reserve Bank of India (RBI) Act, an additional meeting of the MPC is being scheduled on November 3, 2022.
- Section 45ZN of the Act deals with failure to maintain the inflation target.
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RBI To Hold Special MPC Meet on Inflation: What is RBI’s Mandate on Inflation & has it been failing in its mandate?
- By law, the RBI is supposed to target retail inflation at 4%. The law, however, prescribes some leeway to the RBI; it allows for retail inflation to vary by 2 percentage points on either side. So, in a particular month, the RBI could allow inflation to be 2% or 6%.
- This way, on the whole, inflation should be around 4%. The leeway of 2% to 6% does not mean that the RBI can allow inflation to stay at 6% all through.
- But inflation has been rising for over two years.
- Since October 2019, there’s been just one month when retail inflation has been close to 4%. In all other months, even those of the nationwide Covid-19 lockdown in 2020, saw inflation staying well above 4%, and often even above the 6% mark.
- This is central to understanding how the RBI has been failing in its mandate.
RBI To Hold Special MPC Meet on Inflation: What will happen in the meeting?
- This time RBI’s MPC members will not be scratching their heads to decide whether or not to raise interest rates to slay the specter of inflation.
- Instead, the panel will be meeting to compose a nuanced, and possibly elaborate, letter to explain why they slipped up on their mandate to hold inflation within the mandated range of 2 to 6 percent for three consequent quarter.
