Inflation check: What RBI's Nov 3 special meeting of MPC is all about

The Reserve Bank of India (RBI) has announced that it will hold an additional meeting of the Monetary Policy Committee (MPC) on Thursday (November 3).

The meeting schedule of the MPC for 2022-2023 was announced on March 30. As per the original schedule the next meeting after the one during September 28-30, was from December 5 to 7.

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In a press release, RBI said, “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. This announcement is made as per Section 45ZI(4) of the RBI Act 1934.”

Why the special meeting?

For the first time since the implementation of the monetary policy framework in 2016, the RBI will submit a report to the government on its failure to keep the retail inflation rate below 6% for three consecutive quarters beginning January 2022.

The monetary policy framework, which came into effect about six years ago, mandates the RBI to maintain retail inflation at 4% with a margin of 2% on either side.

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In case of failure to maintain the inflation target for three consecutive quarters, the central bank, under section 45ZN of the RBI Act, is required to submit a report to the government explaining the reasons and spelling out the remedial actions it would be taking to check the price rise.

The central bank has called a special meeting of the MPC to prepare its report on missing inflation targets to the government. The six-member rate-setting panel is headed by RBI Governor Shaktikanta Das.

What does Section 45ZN say?

Section 45ZN of the Act deals with “failure to maintain the inflation target”.

As per 45ZN, “Where the Bank fails to meet the inflation target, it shall set out in a report to the Central Government —

(a) the reasons for failure to achieve the inflation target;

(b) remedial actions proposed to be taken by the Bank; and

(c) an estimate of the time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions.

Explanation. — For the purposes of this section, the factors that constitute failure shall be such as may be notified by the Central Government in the Official Gazette, within three months from the date of the commencement of Part I of Chapter XII of the Finance Act, 2016.”

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What RBI Governor said

Governor Das had earlier said the central bank will not make the report public. It is not clear if the government too would like to keep the report confidential or make it public for wider discussions and deliberations, he had said.

To tackle the price rise, the government in 2016 gave a mandate to the RBI to keep retail inflation at 4% with a margin of 2% on either side for a five-year period ending March 31, 2021.

As per a notification issued on March 31, 2021, the central government retained the inflation target at 4% (with the upper tolerance level of 6% and the lower tolerance level of 2%) for the 5-year period April 1, 2021 to March 31, 2026.

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The MPC held its first meeting in October 2016.

The retail inflation based on CPI has remained above 6% since January 2022. It was 7.41% in September. The MPC factors in retail inflation while deciding the bi-monthly monetary policy.

If the average inflation remains above the upper tolerance level or less than the lower tolerance level for any three consecutive quarters, it will be considered a failure on part of the RBI in meeting the inflation-targetting mandate.

The RBI has been aggressively raising the key interest rate since May in a bid to contain inflation. It has so far 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 retained its inflation projection for 2022-23 at 6.7% amid geopolitical concerns triggered by the Russia-Ukraine war, and expected inflation to be under control from January.

It may be noted that inflation had overshot the target for over three quarters during the coronavirus pandemic period as well. But a technical shortcoming in the data collection, wherein data was collected without visiting the mandis because of the pandemic related, had helped ensure that no such explanation had to be given by the RBI at that time.

What do experts say?

Economists expect the MPC to hike the repo rate by at least 35 bps at the December 5-7 meeting, with a possible terminal repo rate of around 6.5%, likely to be achieved by March, a report on MoneyControl said.

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“It is possible that the unscheduled meeting is solely set to respond to the government for missing the inflation target,” said Madhavi Arora, lead economist at Emkay Global Financial Services, was quoted as saying in the report. “However, the fact that it’s kept just after the US Federal Reserve’s November 2 meeting makes it a tad tricky to guess if it’s just going to be a draft response meeting to the government or can have some ‘action’ too.”