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

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

inflation
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.
Manojit Saha Mumbai
3 min read Last Updated : Jun 09 2022 | 6:10 AM IST
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

One subscription. Two world-class reads.

Already subscribed? Log in

Subscribe to read the full story →
Subscribe to Business Standard digital and get complimentary access to The New York Times

Quarterly Starter

₹900

3 Months

₹300/Month

SAVE 25%

Smart Essential

₹2,700

1 Year

₹225/Month

Save 46%

Super Saver

₹3,900

2 Years

₹162/Month

Subscribe

Renews automatically, cancel anytime

Here’s what’s included in our digital subscription plans

Access to Exclusive Premium Stories Online

  • Over 30 behind the paywall stories daily, handpicked by our editors for subscribers

Complimentary Access to The New York Times

  • News, Games, Cooking, Audio, Wirecutter & The Athletic

Business Standard Epaper

  • Digital replica of our daily newspaper — with options to read, save, and share

Curated Newsletters

  • Insights on markets, finance, politics, tech, and more delivered to your inbox

Market Analysis & Investment Insights

  • In-depth market analysis & insights with access to The Smart Investor

Archives

  • Repository of articles and publications dating back to 1997

Ad-free Reading

  • Uninterrupted reading experience with no advertisements

Seamless Access Across All Devices

  • Access Business Standard across devices — mobile, tablet, or PC, via web or app

Topics :InflationReserve Bank of IndiaRBI PolicyMPCShaktikanta DasCPI InflationRBI monetary policy

Next Story