RBI MPC Meeting: The Reserve Bank of India’s Monetary Policy Committee (MPC) will meet on November 3. In the meeting RBI can argue its case strongly with the Central government as to why the inflation was not controlled at 4 per cent, said experts.
The central bank may also sound out the government as to the course of inflation as well as the reasons as to why it may be at the elevated levels.
Currently, the retail inflation in India stands at 7.41 per cent as per September data.
According to the experts, a combination of global and local factors — geopolitical developments, crop production, reduction in crude oil production and the resulting price increase and depreciating rupee — are expected to shot up the prices in coming days.
The apex bank on its part is trying to contain the inflation by increasing the repo rate — the rate at which the RBI lends to the banks.
The RBI has increased the repo rate by 190 basis points in recent times and the last one was by 50 basis points last month.
Madan Sabnavis, Chief Economist, Bank of Baroda, believes that there is a strong case for the RBI arguing that inflation has primarily been caused by supply side shocks with global commodity prices having an impact. “Rupee depreciation has added to imported inflation along with the RBI on its part was proactive in raising rates even between two policies as it did in May when it saw things were going out of hand post Ukraine war,” he said adding that there have been some measures like increase in goods and services tax (GST) which has added to inflation that was happening in parallel.
Therefore, there is an explanation as to why inflation was high. But the RBI has been acting to bring it down through the instruments it has like repo and CRR (cash reserve ratio). It has succeeded in lowering surplus liquidity too which can be proved, he further added.
According to K. Ramasubramanian, retired General Manager, RBI, and a forex advisor, the central bank can say that inflation is due to supply side constraints a nd excess liquidity.
“These apart, there was a huge sale of forex almost ₹3 lakh crore to maintain the exchange rate in the country. Inflation is estimated to come around 6 per cent by three more quarters which was more than the target continuously for three quarters. The repo rate has been increased almost 1.9%,” said Ramasubramanian.
In such a situation, the Committee may only be constrained to say that the present steps taken need some more time for having a positive impact to reduce inflation. This is subject to the time inconsistency impact, he said.
The MPC meet is scheduled for November 3 under Section 45ZN of the RBI Act. As per the said Section, when the central bank fails to meet the inflation target, it shall send a report to the Union government listing the reasons for failure to achieve the inflation target; remedial actions proposed to be taken by the government; and an estimate of the time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions.
The RBI Act allows the MPC to determine the Policy Rate required to achieve the inflation target.
The Act says that the RBI shall organise at least four meetings of the MPC in a year.
Announcing the credit policy RBI Governor Shaktikanta Das said: “There are also upside risks to food prices. Cereal price pressure is spreading from wheat to rice due to the likely lower kharif paddy production.
“The lower sowing for kharif pulses could also cause some pressures. The delayed withdrawal of monsoon and intense rain spells in various regions have already started to impact vegetable prices, especially tomatoes. These risks to food inflation could have an adverse impact on inflation expectations.”
According to the RBI Governor, the Indian basket crude oil price was around $104 per barrel in H1:2022-23 and expected to be around $100 per barrel in H2: 2022-23.
“Taking into account these factors, the inflation projection is retained at 6.7 per cent in 2022-23, with Q2 at 7.1 per cent; Q3 at 6.5 per cent; and Q4 at 5.8 per cent, with risks evenly balanced. CPI (consumer price index) inflation is projected to further reduce to 5.0 per cent in Q1:2023-24,” Das said.
However, one has to see the central bank’s prediction as to crude oil prices ($100 per barrel) as the oil producing countries have announced a cut in their production and the international prices going up.
Economists and common man have a different take on these expectations on inflation.
