RBI’s Letter to Government on Inflationary Pressures!

RBI's Letter to Government

What’s Happening?

According to the provisions of the RBI Act and the Monetary Policy Process Regulations, 2016, the MPC is said to have failed to achieve its objective when the inflation figures as presented by the Consumer Price Index (CPI) remain out of the 2-6% target range for three consecutive quarters.

In this regard, the RBI must explain to the government possible reasons behind the failure to control inflation figures, what remedial steps are to be taken, and provide a timeline for inflation to return to target levels.

It is interesting to note that this is the first time the RBI must issue an explanation to the government for persistent high inflation! The RBI’s MPC met on 3rd November, 2022 for the same!

What Could be the Possible Explanations?

To be clear, the RBI will not disclose its explanation letter to the public, and it will be kept behind closed doors. So we can only discuss the possible explanations provided by the RBI. They can be as follows:

1) First, the Russia-Ukraine war is to blame. It has disrupted the oil and gas supply worldwide and has led to changing world order.

2) While raising interest rates helps tackle demand-side issues, they do not work well with controlling supply-side issues.

3) Also, every other country is facing the same issue. India does not stand in isolation.

What is the Future Outlook?

For September 2022, inflation stood at 7.4%, out of the target band for nine straight months!

According to comments by the RBI management and publications, it will take around two years for inflation to reach 4%. Hence, the primary way to bring back inflation levels is by following the Central Bank of developed countries in hiking interest rates and keeping a check on economic growth!

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