Inflation Target Breach

Syllabus: General Studies Paper 3

In eight years, this will be the first time the RBI would have let retail inflation slip beyond the upper tolerance limit of 6 per cent for three straight quarters.

• The Reserve Bank of India will call a special meeting of its Monetary Policy Committee (MPC) after October 12 to discuss a report it will have to submit to the Union government explaining the reasons for the average retail inflation remaining above the upper tolerance limit of 6 per cent for three consecutive quarters.
• The Union government, in consultation with the RBI, fixes the inflation target for the central bank every five years. 
• It had fixed it at 4 per cent plus/ minus 2 per cent (upper limit 6 per cent, lower limit 2 per cent) for the period August 5, 2016 to March 31, 2021, and retained it for the next five years ending March 31, 2026.
• A monetary policy framework was signed between then RBI Governor Raghuram Rajan (on behalf of the RBI) and then Finance Secretary Rajiv Mehrishi (on behalf of the President) on February 20, 2015. 
• The RBI Act, 1934, was amended in May 2016, giving effect to this framework agreement.
• The framework agreement requires the RBI to submit a report to the Union government if it is in breach of the inflation targets for three consecutive quarters. 
• The average retail inflation in January-March 2022 and April-June 2022, according to data released by the National Statistics Office, was 6.34 per cent and 7.28 per cent, respectively. 
• In July this year, it stood at 6.71 per cent. The data for August and September is scheduled to be released on September 12 and October 12, respectively.
• Upon failing to meet the inflation target, the RBI would have to state the reasons for failure to achieve the target, propose remedial actions to bring it down to 4 per cent, and also provide an estimate of the time-period within which the target would be achieved. 
• These would be presented in a report to the Union Ministry of Finance.
•  It would be up to the government to make the RBI report public. The special meeting of the MPC would discuss the RBI report before it is submitted.

Monetary Policy Committee (MPC)

• Under Section 45ZB of the amended RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee (MPC).
• The Section 45ZB lays down that “the Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation target”.
• Section 45ZB says the MPC shall consist of 6 members:

Composition

• RBI Governor as its ex officio chairperson,
• Deputy Governor in charge of monetary policy,
• An officer of the Bank to be nominated by the Central Board,
• Three persons to be appointed by the central government.
• This category of appointments must be from “persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy”.