The six-member Monetary Policy Committee has the mandate to maintain retail inflation at 4%, with a margin of 2 percentage points on either side. However, for nine months since January, the inflation rate has remained above the upper tolerance band of 6%. It hit 7.41% on the year in September, the fastest pace since April, due to ripples from the Covid-19 pandemic and the war in Ukraine.
If the RBI misses the 2% to 6% level for three straight quarters, it is required to issue a report to the central government. It is obliged to explain the reasons, propose remedial actions and give an estimated time period for achieving the target, under the central bank act.
The deadline for submitting the report is Nov 12, according to a research note by the government-run State Bank of India – one month after the government last released the inflation data.
Experts were not anticipating a rate decision on Thursday.
“The current unscheduled meeting … of the RBI Act is only a part of the regulatory obligation and we do not foresee any other agenda to be announced at this meeting, even as it is scheduled a day after the Fed meet,” Soumya Kanti Ghosh, group chief economic adviser of the SBI, wrote in the note.
N. R. Bhanumurthy, vice chancellor of the Bengaluru-based Dr B.R. Ambedkar School of Economics University, agreed, saying he did not expect the RBI to discuss a rate change. He added that this meeting is “not outside the cycle” because the RBI has to discuss the report it is required to send.
“Very specifically, the agenda also has been specified” by the central bank when it announced late last month that it would hold this “additional” meeting, he said.
The MPC, which was formed in 2016, has twice made surprise rate-related decisions in special meetings – when it cut the benchmark in March 2020 due to the pandemic, and in May this year when it hiked the rate after leaving it unchanged for two years at 4%. In those cases, the RBI did not issue a news release about the off-cycle meetings beforehand.
Since May, the repo rate has been hiked by 190 basis points in four separate moves, to 5.90%.
“In my view, it’s more of an external shock (driving inflation) and I think they need to absorb this shock with less disruption to the overall macroeconomic conditions,” Bhanumurthy said when asked what remedial measures the central bank should take to tame prices.
“Inflation buildup in the global economy has been there for the past year. Global (commodity) prices have gone up … with oil prices remaining above S$90 per barrel for a long time, even before the Ukraine war,” he said. “The global situation is still not getting into a normal condition.”
Bhanumurthy argued that inflation above 6% for three straight quarters “is not a major issue at this point in time”. The question, he cautioned, was whether there would be “some kind of a misstep” as officials attempt to address that issue.
That, he said, “is something that we need to be careful about”.
On what explanation the RBI is expected to give to the government for the missed target, Bhanumurthy noted that the bank is preparing this report for the first time. “They themselves may not know and may be looking at other banks on how to do it.”
“However,” he added, “my feeling is that the RBI would take a very objective view … and should not shift the blame” on supply-side pressures, or the Ukraine war, or other reasons.