Inflation Remains Beyond RBI’s Limit; What Happens If RBI Fails to Meet Inflation Target

Even as the Reserve Bank of India (RBI) has raised the inflation forecast for 2022-23 by 100 basis points (bps) to 6.7 per cent, the projection is above the central bank’s mandate of keeping the retail inflation between 2 per cent and 6 per cent. Now, as the RBI has failed to keep its mandate on retail inflation, the law requires that it will need to submit a report to the Centre explaining the reason of not being able to do so.

According to the Reserve Bank of India Act, 1934, where the central bank fails to meet the inflation target, it shall set out in a report to the central government –– (a) the reasons for failure to achieve the inflation target; (b) remedial actions proposed to be taken by the Bank; and (c) an estimate of the time period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions.

The retail inflation stood at an eight-year high of 7.79 per cent in April, the fourth consecutive month when the inflation rate remained above the RBI’s target limit of 2-6 per cent. The high inflation rate in April prompted the RBI’s Monetary Policy Committee to go for a 40-basis-point repo rate hike in an off-cycle policy review. Thereafter, within a month, the RBI again raised the repo rate by 50 basis points, on Wednesday.

The central government, in consultation with the RBI, determines the inflation target in terms of the Consumer Price Index, once in every five years.

To control the price rise, the government had in 2016 given a mandate to the RBI to keep the retail inflation at 4 per cent with a margin of 2 per cent on either side for a five-year period ending March 31, 2021.

In March last year, the government said, “The inflation target for the period April 1, 2021, to March 31, 2026, under the Reserve Bank of India Act, 1924, has been kept at the same level (2-6 per cent) as it was for the previous five years… So, there’s no change.”

Second time in almost a month, the Reserve Bank of India (RBI) on Wednesday raised the repo rate by 50 basis points to 4.90 per cent to control the inflation. In early May, the central band had also increased the key policy rate by 40 basis points.

Announcing the decision, RBI Governor Shaktikanta Das said, “Inflation has steeply increased much beyond the upper tolerance level… We have already re-prioritised our policies to control inflation, without losing sight of the growth requirements. Our approach underscores a commitment to move towards normal monetary conditions in a calibrated manner. We will remain focused on bringing down inflation closer to the target and fostering macroeconomic stability.”

Kotak Mahindra Bank Chief Economist Upasna Bhardwaj said, “The 50-bp repo rate hike comes on the back of persistence of elevated inflation and the continued upside risks. Given that inflation is expected to remain above 6% through 3QFY23 , RBI has to frontload actions. We continue to see another 60-85bps hike in rest of FY23 to manage inflationary expectations.”

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