RBI monetary policy: Missing inflation mandate now a 'fait accompli'

For the first time since the flexible inflation-targeting framework was put in place in October 2016 for monetary policy making, the Reserve Bank of India (RBI), in all likelihood, will fail to achieve its mandate, which is to keep average inflation at 2-6 per cent for three consecutive quarters.

Consumer price index-based inflation, the yardstick of the RBI in monetary policy making, was, on average, above 6 per cent during the January-March quarter.

The projections of the RBI’s Monetary Policy Committee (MPC) showed that average inflation for the first quarter to the third quarter this fiscal year will be above 6 per cent.

The RBI projects an inflation rate of 7.5 per cent for April-June, 7.4 per cent for July-September, and 6.2 per cent for October-December.

While announcing the monetary policy review on Wednesday, the RBI revised its inflation projection for FY23 to 6.7 per cent from 5.7 per cent estimated in April.

RBI Governor Shaktikanta Das said the baseline inflation projection of 6.7 per cent for 2022-23 did not take into account the impact of the announcements on Wednesday.

While responding to a question during the customary post-policy interaction with the media on failing to meet the inflation framework mandate, Das said he would not speculate on the issue.

While there are still four months before it would be known if the target has been missed, market participants see it as a fait accompli.

“… (Reading) the policy document with its embedded forecasts probably provides some relief that the calibrated stance continues despite this ‘fait accompli’ …,” said Suyash Choudhary, head, fixed income, IDFC AMC.

“(Actions) taken now are unlikely to affect the likelihood of target failure in the near future,” Choudhary said.

If the RBI fails, it has to write a note to lawmakers, explaining the reasons for its failure and the steps it will take to bring inflation back to the target.

According to the law, 4 per cent CPI inflation, give or take 2 per cent, is the RBI’s target.

“We revise our end-FY23 (ends March 2023) repo rate forecast to 6.00% from 5.75% previously…,” Standard Chartered said in a note.

Emkay Global Financial Services said in a report: “FY23 could thus further see rates going up by 75 bps+ ... Our Taylor’s estimate shows a max tightening of policy rate by 6% by FY23...”

Taking Responsibility

• The Reserve Bank of India has been given the mandate to keep average inflation at 4%, with a margin of 2% on  either side

• If inflation breaches this limit for three consecutive quarters, the RBI has to write a letter to the lawmakers explaining the reasons for its failure

• Economists see a sharp interest rate hike by the MPC  to rein in inflation, with the repo rate rising up to 6%

• The repo rate stands at 4.9% after Wednesday’s 50-bp hike