The Reserve Bank will hold a special meeting of its rate-setting committee on November 3 to prepare 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.
The six-member Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das will prepare the report on reasons for failure to meet the inflation target as well as the remedial measures the central bank is taking to bring down prices in the country.
“Under the provisions of Section 45ZN of the Reserve Bank of India (RBI) Act 1934… an additional meeting of the MPC is being scheduled on November 3, 2022,” RBI said in a statement on Thursday.
Section 45ZN of RBI Act deals with failure to maintain the inflation target.
RBI Act mandates that in case the inflation target is not met for three consecutive quarters, the central bank has to submit a report to the government explaining the reasons and detail the remedial actions it will be taking to check the price rise.
This will be the first time since the monetary policy framework came into effect in 2016 that RBI will have to explain its actions to the government.
As per the mandate given to RBI by the Union government, the central bank is required to ensure retail inflation remains at 4 per cent with a margin of 2 per cent on either side.
Inflation had overshot the target for over three quarters during the pandemic also but RBI did not have to provide an explanation to the government. It was because of a technical shortcoming in data collection as data was collected without visiting mandis because of pandemic-related curbs.
The retail inflation based on CPI has remained above 6 per cent since January 2022. It was 7.41 per cent in September. The MPC factors in retail inflation while deciding the bi-monthly monetary policy.
If the average inflation remains above the upper tolerance level or less than the lower tolerance level for any three consecutive quarters, it is considered a failure on part of RBI in meeting the inflation targeting mandate.
Last month, Das said the central bank considers the communication to the government for missing the inflation targets as privileged communication and will not be making it public.
RBI has been aggressively raising the key interest rate since May in a bid to contain inflation. It has so far raised the short term lending rate by 190 basis points taking the rate to a nearly three-year high of 5.9 per cent.
Shashanka Bhide, Honorary Senior Advisor at National Council of Applied Economic Research, Delhi; Ashima Goyal, Emeritus Professor at Indira Gandhi Institute of Development Research, Mumbai and Jayanth R Varma, Professor at Indian Institute of Management, Ahmedabad are among the MPC members.
Apart from Das, RBI Deputy Governor Michael Debabrata Patra and RBI Executive Director Rajiv Ranjan are also MPC members.
Last month, RBI retained its inflation projection at 6.7 per cent for 2022-23.
In August 2016, the central government notified 4 per cent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent.
On March 31, 2021, the central government retained the inflation target and the tolerance band for the next five-year period from April 1, 2021 to March 31, 2026.
The next bi-monthly meeting of MPC is is scheduled to be held from December 5-7, 2022.