Why is RBI Panel holding off scheduled meeting?

Tue Nov 1, 2022

The Reserve Bank of India said that it will hold an additional monetary policy committee meeting on November 3rd 2022 just after the FED meet on November 2. Last meeting of this year was supposed to be held in December but this meeting is being called Because RBI has failed to maintain the consumer inflation target in the last 3 consecutive quarters from January to September 2022. With the retail inflation rising to as high as 7.40% in September RBI has missed maintaining the inflation target of 4% within a band of Plus or minus 2% in the above said period which means that if the Inflation had been 6% or 2 % then it would have been within the tolerable limits of the this defined rule of Monetary Policy. The Central government in consultation with the RBI, determines the inflation target in terms of Consumer Price Index once in 5 years and notifies it in the official gazette. Failure to meet the inflation target for three quarters requires the Reserve Bank to write a report to the government for explaining the reasons for not achieving the target.

What is Section 45ZN of the RBI, Act and Regulation 7?

45ZN got added only in 2016 to the RBI act, this is the act which set up the Monetary Policy Committee. This particular section of the RBI act says that in case the RBI fails to meet the inflation target, it has to write a report to the government explaining the reasons for not achieving the target. In the report, the central bank will have to mention the remedial actions it proposes to take and an estimated time within which the inflation target will be achieved following the timely implementation of the proposed action taken. So, from that point of view, we should take this as an ordinary meeting, where the outcome will be purely a discussion of the inflation, not meeting the target.Regulation 7 of the RBI MPC and monetary policy process regulations, 2016 states that a separate meeting is required to be scheduled as part of the normal policy process to discuss and draft the report to be sent to the government. This report will be written by the RBI.

Why is this Happening? Are we in a Critical Situation

Since it is happening for the first time, I Don't think there is any reason for alarm because it shows that the Banking regulator is well aware of its situation. Although it is a rare event, which we don’t see every day. Law has been framed in such a manner Which fixes the accountability and responsibility towards the government. Such an event helps the government in deciding its resource allocation function. As explained above such an event is happening because the RBI failed to meet the inflation target. The possible reasons that it could mention for missing the inflation target are higher global commodity prices, weak currency, increase in food inflation because of adverse weather situations, and supply chain disruptions. MPC may also discuss the liquidity situation which has dried up in the banking system and on the movement of the Rupee. After remaining in surplus for a long time, the liquidity situation in the banking system has become deficit. between October 20 and October 26, the RBI has injected Rs. 3.21 lakh crore of liquidity into the banking system. Situation of depreciating rupee is obviously a matter of concern for RBI as well Which has depreciated over 11% so far in 2022.

Reporting to Central Government
This letter of reporting to the government Is Privileged communication between RBI and the Government and it will not be making it public.

What to expect?
In the September rate review RBI delivered a third successive 50 bps hike so I don’t think there is much room left for any significant rate hike as we have seen earlier. The only way to prevent 7 percent inflation today would have been done in the second half of 2021. Since we did not normalize interest rates till early 2022, we had already missed it when the Ukraine war started. So, whatever may be do now it can only bring inflation down in mid-2023. Although Bankers are expecting more rate hikes to bring down the inflationary pressure. But what is in the mind of RBI will become much clearer on 3^rd November and post remedial actions taken there upon.