In a first, RBI governor to write to FinMin if inflation target missed

The Reserve Bank of India (RBI) governor will write a letter to the finance ministry if average headline consumer price inflation stays above 6 per cent for three consecutive quarters, which will be over at the end of September.

The format is significant because it will be the template for such communication in future.

RBI Governor Shaktikanta Das will not be in direct communication with Parliament on the subject. Instead, it will be Union Finance Minister Nirmala Sitharaman who will decide whether to place the communication on the table of the House.

It means subsequent discussion, if any, in Parliament on the conduct of monetary policy under the RBI Act will be steered by the fiscal authority, the finance ministry.

“We only need to write a letter to the government, explaining the reasons for the high inflation and the other steps in accordance with the RBI Act,” said a high-level source at the central bank.

Inflation, as measured by the consumer price index (CPI), has remained above 6 per cent, the upper limit of the tolerance band, since January this year.

“Until December, the CPI is expected to remain higher than the upper tolerance level. Thereafter, it is expected to go below 6 per cent (in accordance with) our current projections,” the governor wrote in a media article in June.

Section 45ZN (failure to maintain the inflation target) of the Act notes: “Where the Bank fails to meet the inflation target, it shall set out in a report to the Central Government –– (a) the reasons for failure to achieve the inflation target; (b) remedial actions proposed to be taken by the Bank; and (c) an estimate of the time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions.”

To interpret the Act, an agreement on the Monetary Policy Framework, signed by the government of India and the RBI (signed by the finance secretary and the governor of the RBI), has been in operation since February 20, 2015.

It was renewed in 2021.

According to it, CPI inflation should be 4 per cent, give or take 2 per cent. If it exceeds 6 per cent for three consecutive quarters, the RBI has to provide an explanation.

Since a communication from the RBI under the Act is unprecedented, it is the finance ministry which has to decide on the subsequent steps.

“There is no such provision in the RBI Act,” said Chakshu Roy, head of outreach, PRS Legislative Research.

“It is the prerogative of the finance minister to table the central bank’s report in Parliament.”

There have been occasions when key regulators, including the RBI governor, have appeared before a parliamentary committee, but those have been on banking-related issues.

But this will be the first time when the performance of the RBI as a monetary policy setter will come up before Parliament.

Roy said there was a case for the RBI governor to regularly update Parliament about the country’s monetary policy issues.