The RBI has failed to bring the inflation rate below the upper limit of 6% in the last three quarters, or nine months. Inflation has remained above the 4% target for more than three years now, or thereabouts during the tenure of Governor Shaktikanta Das, who as Economic Affairs Secretary in the Modi government led the amendments to the RBI Act by Parliament. He also coordinated from the government side with the central bank the transition to the formal inflation targeting regime through which New Delhi had aimed to enhance the credibility and accountability of the RBI, as ultimately it is the political class that is questioned and often penalized by voters. for the price increase. He is now complying with the amended law – and he is the first RBI governor to fail on the inflation target.

The amended law requires the RBI to explain in writing the failure to keep inflation within tolerance for three consecutive quarters, the reasons for the failure and the actions the central bank plans to take to bring inflation back under control. . The Monetary Policy Committee (MPC) of the RBI met on November 3 to prepare this letter of explanation to the government. Das said the RBI would not make public the explanation sent to the government. However, the government is expected to make it public since inflation and the failure of the RBI are subject to public – and parliamentary – scrutiny.

If not, statements made by MPC members at recent meetings may be a good indicator of what the RBI’s letter of explanation is likely to contain. Mint SnapView studied official minutes for potential pointers.

RBI Deputy Governor Dr. Michael Debabrata Patra’s statement in the minutes released on October 14, 2022 suggests that the central bank may plead not guilty arguing that global factors made it difficult to project inflation and complicate its monetary policy choices and their effectiveness, all this means that great sacrifices of growth will be necessary to rein in prices. He can cleverly deflect the blame at the door of the systemic central banks (the US Federal Reserve in other words) and argue that much of the inflation in India is imported inflation. Dr Patra’s statement also suggests that the RBI does not see itself in a position to bring inflation under control until 2022 or even 2023.

This inflationary shock goes against conventional forecasting models. The parameters that characterize recent developments are well outside the ranges predicted by conventional models. …currently available inflation projections suggest that real policy rates will remain negative until the end of 2022. Therefore, more aggressive monetary policy tightening in 2023 may be needed if terminal rates are to be reached…

For net commodity importers like India, with more than a third of the CPI imported, a negative terms-of-trade shock complicates macroeconomic management…

No country is immune. Systemic central banks should consider the possibility that today’s fallout may become tomorrow’s fallout…

Forward-looking RBI surveys suggest selling prices in manufacturing and services could rise further as the pass-through of input cost pressures remains incomplete. Exchange rate volatility amplifies these pressures on basic prices…

His statement in the minutes published on August 19, 2022 adds the Covid-19 relief stimulus in advanced countries to the list of reasons for the failure of the RBI.

As inflation remains high around the world and a widespread sense of guilt over the consequences of the pandemic stimulus has been understated, central banks have embarked on the most aggressive, most aggressive monetary policy tightening. early and the most synchronous in decades…

In the same statement, Dr. Patra also touched on what the RBI is doing to control inflation by explaining that it accelerates interest rate hikes.

The monetary policy response to supply shocks should be based on managing expectations and building credibility… By pre-feeding monetary policy actions, credibility is demonstrated by showing commitment to the objective of ‘inflation.

Dr. Shashanka Bhide’s statement in the minutes released on August 19, 2022 suggests that the protracted conflict between Russia and Ukraine and supply disruptions will be one of the reasons the RBI will give in its letter of explanation.

The protracted conflict between Russia and Ukraine and supply disruptions, especially for energy and food commodities, are a major source of uncertainty for price developments. The direct impact of supply disruptions, while targeting certain geographies, is quickly transmitted elsewhere to address global demand and supply imbalances.

RBI Executive Director Rajiv Ranjan’s statement in the minutes released on June 22, 2022 made similar remarks on the sources of inflation.

The ongoing war in Europe and the ensuing sanctions have weighed heavily on the global economy by worsening supply chain disruptions and increasing uncertainty about post-pandemic recovery. As inflation hits multi-decade highs in several countries and remains stubborn, the risks of long-term inflation expectations going haywire have multiplied, leaving monetary authorities with little room for manoeuvre.

His statement in the minutes published on August 19, 2022 indicates that on the measures it has taken to fight inflation, the RBI is likely to highlight rate hikes from the unscheduled MPC meeting in May of This year.

Household inflation expectations in India, being adaptive and backward-looking and influenced mainly by food and energy price expectations (which constitute almost 55% of the CPI basket), moderated in the July cycle 2022 but remained at high levels. The stalling of inflation expectations, against the backdrop of soaring inflation following the conflict in Europe, is the biggest risk the MPC has addressed through the off-cycle encounter and early rate actions in order to increase the effectiveness of actions.

Professor Jayanth R. Varma’s statement in the minutes published on October 14, 2022 suggests that RBI could say that it would take up to six quarters or 18 months to bring inflation under control even after raising the repo rate to around 6%.

It may take 3-4 quarters for the policy rate to transmit to the real economy, and the peak effect may take up to 5-6 quarters. If we increase the repo rate to around 6% at this meeting, that would represent a cumulative increase of around two percentage points in just four months. Even this underestimates the extent of monetary tightening, as a few months ago money market rates were close to the reverse repo rate (65 basis points below the reverse repo rate). Given this, the total extent of monetary tightening would be well over 250 basis points.

Much of the impact of this major monetary policy action has yet to be felt in the real economy…

… given that monetary policy acts with lags, what is relevant are the inflation forecasts 3-4 quarters ahead. The RBI forecast and the survey of professional forecasters show that inflation will fall to around 5% in the first quarter of next fiscal year.

Do these points mitigate the failure of the RBI? Not really. The RBI has not had to deal with a loose fiscal policy of the kind the US Treasury has chosen and with which it has stimulated the US economy. Second, India did not suffer from a food price crisis after the outbreak of war in Ukraine due to the comfortable policy of buffer stocks and the Modi government’s program to provide free food grains. On energy inflation, the pressure is also less, as India buys crude oil at a reduced price from Russia. It is unconscionable that apart from food and fuel prices, India’s inflation (what economists call core inflation) has averaged at the upper tolerance limit of 6% for more than a year now.

The reason CPI inflation has remained above the 4% target level for three years now is because the RBI has not taken the inflation target seriously. It was quite comfortable with inflation at 6% and instead pledged to stimulate growth, but provided neither a boost to private investment, essential for quality GDP growth, nor low inflation. It was content to limit itself throughout to liquidity operations. The MPC only started raising interest rates after inflation breached the upper tolerance limit, knowing full well that monetary policy works with lags.

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