RBI Monetary Policy Committee Meeting Updates: The Reserve Bank of India’s monetary policy committee (MPC) met in an off-cycle meeting today, November 3, laying down an official explanation to the central government as to why it failed to keep inflation within the tolerable target band of 2-6 per cent for three consecutive quarters. The committee discussed the draft report that will be sent to the central government. The consumer-based inflation for the month of September spiked to a five-month high of 7.41 per cent. The six-member committee, chaired by RBI governor Shaktikanta Das, held the additional, off-cycle meeting for the first time since its establishment in 2016.
The Bank of England raised interest rates to 3% on Thursday from 2.25%, its biggest rate rise since 1989 as it warned of a “very challenging” outlook for the economy. The central bank forecasts inflation will hit a 40-year high of around 11% during the current quarter, but that Britain has already entered a recession that could potentially last two years – longer than during the 2008-09 financial crisis. Read full story
The Reserve Bank‘s rate setting panel met on Thursday to discuss and draft a report for the government on why it failed to keep retail inflation below the target of 6 per cent for three consecutive quarters since January this year. Read full story
The retail inflation based on Consumer Price Index (CPI) has remained above 6 per cent since January 2022. September inflation came in at five-month high of 7.41 per cent.
The Secretary to the Committee shall schedule a separate meeting as part of the normal policy process to discuss and draft the report to be sent to the Central Government under the provisions of Section 45ZN of the Act. The Report shall be sent to the Central Government within one month from the date on which the Bank has failed to meet the inflation target. The Bank shall send the report to the Central Government in the event of a failure to achieve the target as specified by Rules of the Central Government, in this regard.
“A separate meeting of the Monetary Policy Committee (MPC) was held on November 3, 2022 to discuss and draft the report to be sent to the Government by the Reserve Bank of India (RBI) under the provisions of Section 45ZN of the RBI Act, 1934 and Regulation 7 of RBI MPC and Monetary Policy Process Regulations, 2016. The meeting was chaired by Shri Shaktikanta Das, Governor and attended by all MPC members – Dr. Michael Debabrata Patra, Dr. Rajiv Ranjan, Dr. Shashanka Bhide, Dr. Ashima Goyal and Prof. Jayanth R. Varma.” – Reserve Bank of India
RBI's monetary policy committee met on Thursday and discussed the draft report to be sent to the central government. The off-cycle meet was chaired by RBI governor Shaktikanta Das and was attended by all the other members of the committee. The next MPC meet is scheduled to be held from December 5th to 7th, 2022.
“The MPC minutes show a growing difference of opinion within the MPC, with policy makers divided on future action and the rate trajectory. Still, higher September CPI and an above-target tracking estimate for October keep more hikes in play.” – Rahul Bajoria, chief India economist, Barclays
“Excessive rate rises will not make inflation targeting credible if they are unable to lower supply-side inflation and instead raise costs as demand and investment falls.” – RBI MPC member Ashima Goyal
The RBI MPC minutes revealed that the committee members were tussling between inflation concerns and growth worries, while deciding the further course of action to maintain financial stability. The minutes showed a 5:1 favouring of 50bps hike in the last MPC meet.
The Reserve Bank of India projected the inflation levels for the October-December quarter at 6.5 per cent, whereas, 5.8 per cent for the fourth fiscal quarter. Inflation is projected to average at 6.7 per cent in 2022-23.
“We expect inflation to fall sharply in October, on a combination of high base effects, declining imported prices, and some sequential reversal in food prices. The uptick in food prices is largely seasonal, wherein the price of commodities rise before the harvesting period. Thus, a reversal in increasing food prices can be expected in the coming months barring any extreme weather events.” – Rahul Bajoria, India Economist, Barclays
One of the key factors that can curb the rising inflation are the moderating imported food price pressures. The primary focus is on the prices of cooking oil, cooking gas and kerosene, and feedstock, which are set to decline, albeit marginally, a Barclays report said.
India’s WPI (Wholesale Price Index) inflation cooled off in September and came in at 10.7 per cent, down from 12.41 per cent in August. Despite maintaining a downward trend, the wholesale-based inflation printed double digits for the 18th month in a row since April 2021.
Food inflation in September 2022 came in at 8.41 percent as against 7.62 percent in the preceding month. Inflation rate for vegetables grew by 18.05 percent in September. For pulses, the inflation rate came in at 3.05 percent. Fuel and light inflation fell to 10.39 percent in contrast to 10.78 percent in August. Clothing & footwear inflation grew by 10.17 per cent. Apart from this, milk and products inflation rate came in at 7.13 per cent, fruits inflation rate rose by 5.68 per cent, spices grew by 16.88 per cent, while inflation rate for packaged meals, snacks or sweets increased by 7.76 per cent.
“Over the last three years, we have utilised the flexibility in the monetary policy framework to calibrate our actions to counter the adverse effects of COVID-19 and other international factors like the war in Ukraine. We have refined our inflation forecasting methodology by incorporating new techniques and are delving deep into the granularity of inflation projections.” – Shaktikanta Das
Domestic inflation remains elevated an thus, the RBI is closely monitoring inflation trends, along with the effect of the central bank's past actions, said RBI governor, Shaktikant Das. “Our constant endeavor is to keep an Arjuna’s eye on inflation, which is our primary target,” he added.
The RBI MPC comprises of three internal and three external members.
1. Shaktikanta Das, RBI Governor
2. Michael Debabrata Patra, RBI Deputy Governor
3. Rajiv Ranjan, RBI Executive Director
4. Shashanka Bhide, Honorary Senior Advisor at National Council of Applied
Economic Research, Delhi
5. Ashima Goyal, Emeritus Professor at Indira Gandhi Institute of Development Research, Mumbai
6. Jayanth R Varma, Professor at Indian Institute of Management, Ahmedabad
The central government, in August 2016, set the target CPI inflation at 4 per cent for the period August 5, 2016 to March 31, 2021. The upper tolerance limit was 6 per cent, while the lower tolerance limit was 2 per cent. In March 2021, the government retained the target and the tolerance band for inflation for the next five-year period, i.e. from April 1, 2021 to March 31, 2026.
The high inflation print was driven by soaring food prices. Food inflation came in at 8.4 per cent, the highest since November 2020. Cereal prices rose the sharpest – 11.53 per cent on-year – mainly led by rice and wheat. The unseasonal rains before the harvest season reduced summer-sown crops such as rice, cotton, pulses, while also impacting plantation of wheat, which will keep the food prices sticky for a long time, according to analysts.
Nifty below 18,100, while Sensex trading at 60,782 ahead of the MPC meet today.
“It may take 3-4 quarters for the policy rate to be transmitted to the real economy, and the peak effect may take as long as 5-6 quarters. If we raise the repo rate to around 6 percent at this meeting, that would be a cumulative increase of around two percentage points in the space of just four months.” – RBI MPC member, Jayanth R Varma
“Monetary transmission has some lag effects for at least two quarters and we will see the changes in the inflation numbers in the coming quarter. Discussions between RBI and the government are a sign of good governance and we are sure the rationale RBI is placing will be aligned to what the right action should have been.” – Vivek Iyer, partner and leader, financial services risk, Grant Thornton Bharat
Under section 45ZN of the Reserve Bank of India Act of 1934, when the central bank fails to meet the inflation target, it shall set out in a report to the central government mentioning:
a. the reasons for failure to achieve the inflation target
b. remedial actions proposed to be taken by the Bank
c. an estimate of the time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions
“Going by the Fed dot-plot and a terminal rate projection of 4.6% in the US, we may see another 50-75bps of cumulative rate hikes this financial year. The domestic economy and markets might look decoupled from the rest of the world, but the decoupling might not sustain for long if the global economic and financial instability get worse from here.” – Ritika Chhabra, economist and quant Analyst, Prabhudas Lilladher.
The central board of directors of the RBI met on Monday, October 31, and reviewed the current economic situation. “The Board in its meeting reviewed the current economic situation, global and domestic challenges including the overall impact of current global geopolitical crises,” RBI said in a release.
“Markets, citizens should know MPC’s decision. But letter to the government (after failure) is sent under law. I don’t have the privilege or authority or luxury to release it to the media before the addressee gets it.” – RBI Governor Shaktikanta Das
“With monetary policy actions and stances undergoing a regime shift in advanced economies, financial conditions have tightened across markets and accentuated financial stability risks. In an uncertain environment, the Indian economy has been growing steadily drawing strength from its macroeconomic indicators, buffers.” – Shaktikanta Das, RBI Governor, at FICCI Banking Conference-FIBAC 2022
“The upcoming impromptu meeting by the RBI on 3rd Nov’22 is going to be more about inflation than interest rates. The rate-setting panel has to send out a letter to the government mentioning the reasons with regards to missing out on its inflation target. They also have to mention the counter-actions that it prepares to undertake to bring the inflation back in its targetted zone.” – Heena Naik, Research Analyst (Currency) , Angel One Ltd
“We don’t think the MPC will be announcing any rate action. The meeting will focus on drafting and finalizing the report required to be submitted to the central government for failure to comply with the inflation target band of 2-6% for three consecutive quarters”. –
Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities
RBI MPC’s last meeting highlighted a hawkish stance wherein five out of the six members voted for 50 basis points interest rate hike. In all, the RBI has hiked the repo rate by 190 basis points since April 2022 in efforts to tame the rising inflation.
“We do not expect any major announcements or policy changes during the meeting. This seems to be a procedural meeting to draft a report on why the MPC has not been able to keep the inflation within the mandated band of 2-6 percent for three successive quarters. This report is mandatory under the legislation establishing inflation targeting in India.” – Sujan Hajra, chief economist, Anand Rathi Shares and Stock Brokers