The Monetary Policy Committee (MPC) of the Reserve Bank of India will hold a special meeting on the sidelines of its scheduled meetings on Thursday. In this special meeting, the reasons for inflation not coming under control even after four hikes in the repo rate will be discussed. Also, after this meeting, the Monetary Policy Committee will write a letter to the government informing about the reasons for not controlling inflation.
The central bank aims to keep inflation within 2-6 percent. Talking about the medium-term general target, the standard target of RBI is 4 percent, with a scope of increase or decrease of 2 percent.
Why is the meeting taking place?
RBI's rules state that if the inflation target is not met for three consecutive quarters, the central bank submits a report to the government, detailing the reasons for the failure to achieve the inflation target, and what action will be taken. And what was their impact? RBI will also have to give an estimated time frame by which it can control inflation.
The special meeting is being held for the first time since the MPC's inception in 2016, as the committee has failed to keep retail inflation within the 2-6% band for three consecutive quarters. Retail inflation has remained above 6% since January and rose to a five-month high of 7.41% in September due to a rise in food prices.
What reasons can RBI give for missing the target?
Former BoM economist Jatin Salgavkar believes that the RBI has made an honest effort on its part, but unfortunately, inflation has not come down. Many things are responsible for this. The central bank could cite external factors such as the Russo-Ukraine war, supply concerns (which pushed up commodity prices), supply chain disruptions, and long-term conditions stemming from the COVID-19 pandemic.
What time frame will RBI give to bring inflation on target?
RBI expects inflation to fall to 4% over two years. Governor Shaktikanta Das has expressed their hope many times.
How important is the meeting for investors
Markets are uncertain these days. They are already under pressure from the US Fed rate hike. They want some clarity on the timeline. If RBI gives a deadline to bring inflation within the tolerable band, then certainly the market can get some positive hope.
After raising rates by 190 basis points since May, investors are eager to know how much more RBI can tighten monetary policy.
Is there room for an increase in rates?
Experts believe that at present, no decision related to the repo rate hike is expected in this meeting of RBI MPC. But it cannot be completely denied. There is a discussion that RBI can also increase its rates. State Bank of India's Chief Economic Adviser Soumya Kanti Ghosh has said that the meeting to be held on 3 November 2022 is only a part of a regulatory obligation.
What will be the effect of the US Fed rate hike
Markets and central banks around the world could follow the trend after the US Fed raised interest rates by 75 basis points. The growth rate of the economy slows down due to rising interest rates. This adds to the fears of a recession. Because of the decision of the US Fed, all Asian countries including Europe also start increasing their interest rates. Due to this the growth rate of those countries will also be affected.
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