After October 12, the Reserve Bank of India will hold a special meeting of its Monetary Policy Committee (MPC) to discuss a report it must present to the Union government explaining the reasons why the average retail inflation rate has remained above the upper tolerance limit of 6% for three consecutive quarters.
Every five years, the Union government sets the central bank’s inflation target after consulting with the RBI. For the period from August 5, 2016, to March 31, 2021, it was set at 4% plus or minus 2% (highest limit: 6%, lower limit: 2%), and it remained at that level for the next five years, ending on March 31, 2026.
The political class has long recognized that inflation or price increases disproportionately affect the poorest people and have a negative long-term impact on GDP. As a result, the Union government decided to provide the RBI with a legal foundation for setting inflation objectives. On February 20, 2015, then-RBI Governor Raghuram Rajan (representing the RBI) and then-Finance Secretary Rajiv Mehrishi (representing the President) signed a framework for monetary policy. This framework agreement became effective in May 2016 after the RBI Act of 1934 was amended.
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. This will be the first time in eight years that the RBI will have let retail inflation rise for three consecutive quarters beyond the top tolerance range of 6%.
According to the sources, it would be up to the government to make the RBI report public.
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