RBI News: RBI Oct letter to finmin will give plan for inflation | India Business News – Times of India

MUMBAI: In October, RBI governor Shaktikanta Das, in all likelihood, will write to the finance ministry explaining why the central bank failed to keep inflation within the range of 2-6% for three consecutive quarters. In the communication, he will also have to provide an action plan for getting prices back in control.
When the RBI Act was amended in 2015 to enable the creation of the monetary policy committee (MPC), it was probably never envisaged that two Black Swan events would follow in succession — the pandemic and the Ukraine war. There is no precedent on how the government will react to the letter as such a situation has never arisen before.
Inflation in India has been consistently over 6% since January, largely due to the surge in crude oil prices after the Russian invasion of Ukraine and the subsequent sanctions on Russia. While the target rate for inflation is 4%, the RBI is allowed an additional 2% leeway under the flexible inflation target regime. By September, inflation would have been outside the tolerance band for three successive quarters.
Section 45ZN of the RBI Act states that besides providing the reasons for failure, the central bank has to give the remedial measures that it plans to take and an estimate of the time within which it shall achieve the inflation target. Globally, central banks like the Bank of England and Reserve Bank of Australia have indicated a long-term plan to get inflation within the target range only by 2024. The RBI has forecast that inflation for FY23 would be 6.7%.A recent speech by RBI deputy governor Michael Patra provided an indication of what the RBI is likely to say in the letter. “It is our hope that required monetary policy actions in India will be more moderate than elsewhere in the world and that we will be able bring inflation back to target within a two-year time span. If the monsoon brings with it a more benign outlook on food prices, India would have tamed the inflation crisis even earlier,” Patra had said in a speech at the PHD Chamber of Commerce.
In his speech, Patra had said that even if there were to be a breach of the accountability criteria, India would succeed in bending down the future trajectory of inflation, winning the war in spite of losing the battle. More recently, in the post-MPC meeting, Patra had said in a press conference last week that RBI’s path to a neutral rate is a two-milestone journey. “The first milestone is when inflation falls into the tolerance band, and the second is when it aligns with the target,” he had said.

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