The Russian invasion of Ukraine hurt the global supply chain and increased the oil and food prices. The higher global inflation also pushed up interest rates, which impacted currencies, and consequently the strengthening of dollar and rupee depreciation has increased the cost of imports. Despite the Reserve Bank of India’s all-out efforts to rein in inflation, as well as manage the USD-INR pricing stability, the inflationary number has been breached. The Consumer Price Index (CPI), which is the retail inflation indicator, has been much above the RBI’s upper target range of 6%, for eight consecutive months. It has surged to a five-month high of 7.41% in September.
As per Section 45ZA of the RBI Act, if it fails to meet the inflation target for three consecutive quarters, it will have to write to the Government, specifying the reasons for the failure to achieve the target, the remedial actions it proposes to take, and the estimated time period within which the target will be achieved.
This communication is an integral part of holding the RBI accountable for its monetary policy decisions. It has to be noted that in the year 2020, during the pandemic, inflation tolerance range was breached. Because of the lockdowns, RBI stated that they couldn’t obtain the data needed to calculate inflation.
Incidentally, it was the current RBI Governor, the then economic affairs secretary, who framed the rules for the Monetary Policy Committee (MPC) policy framework in 2016. Central banks across the UK, Brazil and Norway are those among a few other nations which have this norm of addressing their rationale and actions as a letter to the Government.
As per the RBI’s estimates, inflation would average 6.7% in FY23 and be at 7.1% in Q2, 6.5% in Q3, 5.8% in Q4, and 5.1% in Q1 FY23.
Optics and semantics
Now that the RBI has scheduled an out-of-turn MPC meeting for today, speculation is rife that it may discuss the explanation letter that it is to send to the Government, on not meeting its inflation target. Or that it might increase the repo rate again, with the soaring inflation and rupee-dollar tussle.
A few weeks ago, the RBI Governor called the communication between the Central bank and the Government privileged and said that the explanation letter that it would send to the Government for missing its inflation targets will not be made public.
Many economists might like to read that note for academic interest. But the MPC minutes of the past few quarters are ample reading material in themselves, in terms of the institutional thinking with the data available for those discussions. It would be interesting to see if the MPC has a mind of their own in addressing their concerns to the Government.
Just like any institution has to manage public stakeholder perceptions and opinion in their functioning, inflation management has perception issues politically as well. The RBI’s perceived failure to maintain inflation could be used as political fodder, something that the stakeholders may not bother about or have time for.
That the RBI and the Government have been aligned in this fight against inflation is amply evident in the various actions that they have taken over time. One cannot fault the RBI is its inflation-battling over the months, especially in light of the turmoil in global supply chains, geopolitical skirmishes, increased food prices, oil production cuts globally, aggressive monetary policy actions by other Central banks and consequent global economic nosedives.
The various public statements of the leaders from both sides (Government and RBI) over the past months have been expressing similar sentiment and support for each other’s actions. So nothing out of the ordinary might be expected in such an explanatory note, so much so that many expect it to be a process-driven filing of paperwork.
One might argue that for showcasing the RBI’s independence, it would do justice to table the note in the public domain. It would help to enhance the RBI’s image about its policy thinking and showcasing greater accountability, just as much as it expects from the sectors and entities it regulates.
Interestingly, on the sidelines of the annual meetings of the Board of Governors of the IMF and the World Bank Group, Garcia Pascual, Deputy Division Chief of the Monetary and Capital Markets Department of the IMF, praised the RBI for tightening the monetary policy to curb inflation in the country. In addition, IMF Managing Director Kristalina Georgieva stated, “India deserves to be called a bright spot on this otherwise dark horizon because it has been a fast-growing economy, even during these difficult times, but most importantly, this growth is underpinned by structural reforms.”
Here is another reason why there might not be any sharp ideological differences on this topic between the Government and the RBI, especially when our economy has fared a lot better compared to global economies. And hence this explanation note topic is unlikely to be of meaningful consequence, as it may not give the world anything to read between the lines. Is it a case of much “we-do” about nothing?
Srinath Sridharan is a corporate advisor and independent markets commentator
