What Forced RBI To Call An Out-of-Turn MPC Meeting

The Reserve Bank of India (RBI) has called for an emergency meeting of its Monetary Policy Committee (MPC) on November 3. The next meeting of the MPC, which is expected to meet four times a year, was slated for December 5-7. The announcement of this off-cycle meeting comes after the central bank repeatedly failed to meet its inflation target for three consecutive quarters. As such, the RBI is required to draft a report to the union government, detailing the causes of the failure and steps required to mitigate the situation.  

In the six years since the MPC came into being, this is the first time that the inflation target has not been met for three straight quarters. In the report to be shared with the government, which is mandated under Section 45ZN of the RBI Act 1934, the RBI is also required to include a time-period within which the inflation target will be achieved. The content of this report will be discussed during the emergency meeting. RBI Governor Shrikanta Das has already mentioned that the content of the report will be viewed as privileged communication and that the central bank will not disclose it to the public.

Missed Targets

The RBI is required to control inflation by using different policy tools at its disposal, including repo and reverse repo rates. The MPC determines the repo rate, based on consumer price indices, and this rate is binding on the RBI, as per section 45ZB of the amended RBI Act. This benchmark rate is the reference against which all other interest rates are decided in the country.  

India's retail inflation has a target of 4 per cent, with a two per cent leeway on either side, effectively making it a target band of 2-6 per cent. In the initial 9 months of this year, the average retail inflation has been 6.8 per cent, well above the target. The consumer price index-based inflation stood at 7.41 per cent in September.  

The MPC, in their September meeting, had hiked the repo rate by 50 basis points (bps) to 3-year high at 5.90 per cent. Since April, the benchmark lending rate was increased four times by a cumulative 190 bps. Yet, despite all these hikes, the RBI has been unable to bring retail inflation within the acceptable limits.  

High crude oil prices and the depreciating value of the Indian rupee are cited as reasons for RBI's failure. However, it has to be highlighted that the RBI has been pumping additional liquidity into the Indian financial system. Even during the peak of Covid, RBI increased the liquidity in supply to provide a monetary cushion to the union government.

RBI's Terrible Transient Inflation Theory
The RBI has long been of the view that India's inflationary situation is transient and did not see it as a pressing danger. Continuous failure in meeting the inflation target suggests that it is not the case. The central bank's increases in lending rate, which arrived late, have not been successful so far. Following the Covid-induced slowdown, other world economies also tried pumping up their liquidity earlier before it backfired on their inflation targets. Eventually, they had to increase their lending rates. The US has also been aggressively hiking their repo rate and it recently touched a 14-year high.

The timing of the MPC's emergency November meeting suggests that another hike in the repo rate might be in the offing though. This is because the US Federal Reserve is also scheduled to meet on November 2, with the possibility of further rise in repo rates there to keep a check on their inflation.  

If inflation remains out of control, it would mean a struggle to make ends meet for the majority of India's population. As the Russian war on Ukraine continues, and the global economy slows down, it is important to ensure that there are sufficient checks on domestic inflation.