RBI to convene special MPC meeting on 03rd November

In a statement on 27th October 2022, the Reserve Bank of India (RBI) issued a press release stating that the Monetary Policy Committee (MPC) will convene an additional meeting on monetary policy on 03rd November 2022. This meeting has been called under Section 45ZI(4) of the RBI Act 1934 and has been triggered to discuss the response of the RBI in reining in inflation. It may be recollected that the RBI had set the target repo rate at 4% with a range of 2% on the lower side and 6% on the upper side. However, for the last 3 quarters in succession, the rate of consumer inflation has been above the outer limit of 6%.

As per the Monetary Policy Framework under the RBI Act 1934, the RBI is obliged to provide a detailed report to the government of India, if it fails to meet the inflation target for a prolonged period. The agenda of the meeting would be to discuss and debate over a report provided by the RBI furnishing reasons for its inability to contain inflation within the stipulated limits of 6% for 3 quarters in succession. Apart from an analytical report, the meet will also discuss remedial actions proposed by the RBI as well as a review of revised estimates to bring inflation within the stipulated target levels in committed time limits. 

 Also read: Highlights of RBI Monetary Policy and Market Performance

Indian inflation has been consistently high due to the combination of robust spending as well as supply chain constraints imposing cost push inflation. Since the special May 2022 meeting of the MPC, the rates have been hiked by 190 basis points from 4% to 5.90%. with the Fed likely to raise rates by another 150-200 bps from current levels, the RBI may revise its terminal rate targets from the current 6% to 6.5% or higher. But the bigger challenge for the RBI now would be to action Plan-B since a pure focus on rate hikes does not appear to be yielding tangible results for the economy in terms of inflation control.

The table below captures the 2 factors that have pushed the consumer inflation higher in India viz. food inflation and core inflation. Remember, overall inflation has been higher despite tapering of energy prices in India.

Data Source: MOSPI

If you look at the headline inflation for September 2022, it has been at 7.41%, well above the outer limit of 6%. This is the first time that the actual headline inflation has consistently been above the targeted levels for 3 quarters in succession. 

It is not just that the CPI inflation has breached the outer limit of 6% for 3 quarters in succession. If you compare the inflation with the average inflation target of 4%, then actual inflation has been  higher for 36 months in succession. Clearly, there is something that the regulators appear to be missing out in the inflation control battle. Or, perhaps, like the US Fed the RBI also needs to have keep immense patience when it comes to dealing with inflation in a unique macroeconomic scenario. These issues should get a lot more clarity in the special meeting of the MPC.

However, it remains to be seen how much of the RBI report to the government is actually made public, since it is likely to be treated as classified data. If one were to look at the inflation overshooting targets, there could be 3 reasons for the same. Firstly, since the revenge spending is in the aftermath of the pandemic, there is a lot of consumption slack and that is spoiling the inflation targeting. Secondly, the Ukraine war is not just about oil but also about scores of other products, all of which have become expensive. Finally, RBI may have started hiking rates too late, but that is like being prophets of the past.

There is one more thing we must not miss about the timing of the special meeting of the MPC. It is scheduled just a day after the Fed statement is made late on 02nd November. Clearly, the Fed is likely to announce another 75 bps rate hike, if you go by the CME Fedwatch indications. That would leave a huge gap in the RBI efforts and waiting till December to respond would be too late. The RBI may also use this special meeting to make a quick adjustment to rates in the light of the Fed statement and its language. That would be like hitting two birds with one stone, but hawkishness by RBI is here to stay.