RBI To Hold Special MPC Meet on Inflation

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RBI To Hold Special MPC Meet on Inflation: Why in News?

The Reserve Bank on October 27, 2022 called a special meeting of the Monetary Policy Committee (MPC) on November 3 to prepare a report on its failure to keep retail inflation below 6 percent for three consecutive quarters.
This is for the first time since its constitution in 2016 that a six-member interest rate-setting body is meeting for such a purpose

Inflation in India has remained above the upper tolerance limit of 6 percent for nine consecutive months or three quarters.
The consumer price-based index (CPI), or retail inflation, accelerated to 7.4 percent in September from 7 percent in August.
CPI has been above the Reserve Bank’s tolerance band of 2-6 percent since January 2022, resulting in a 190 basis points (bps) increase in repo rate since May this year.
Retail inflation has consistently been above the upper bound of 6 per cent since January and the RBI has hiked the policy repo by 190 basis points this year to tackle elevated inflation.

Under the provisions of Section 45ZN of the Reserve Bank of India (RBI) Act, an additional meeting of the MPC is being scheduled on November 3, 2022.
Section 45ZN of the Act deals with failure to maintain the inflation target.

By law, the RBI is supposed to target retail inflation at 4%. The law, however, prescribes some leeway to the RBI; it allows for retail inflation to vary by 2 percentage points on either side. So, in a particular month, the RBI could allow inflation to be 2% or 6%.
This way, on the whole, inflation should be around 4%. The leeway of 2% to 6% does not mean that the RBI can allow inflation to stay at 6% all through.
But inflation has been rising for over two years.
Since October 2019, there’s been just one month when retail inflation has been close to 4%. In all other months, even those of the nationwide Covid-19 lockdown in 2020, saw inflation staying well above 4%, and often even above the 6% mark.
This is central to understanding how the RBI has been failing in its mandate.

This time RBI’s MPC members will not be scratching their heads to decide whether or not to raise interest rates to slay the specter of inflation.
Instead, the panel will be meeting to compose a nuanced, and possibly elaborate, letter to explain why they slipped up on their mandate to hold inflation within the mandated range of 2 to 6 percent for three consequent quarter.