RBI release suggests Nov MPC meet only to discuss inflation target failure

MPC may decide RBI's response to govt on the matter; Unlike earlier off-cycle meetings in which interest rate action was taken outside schedule without prior notice, this one was announced in advance

On Thursday, the Reserve Bank of India announced an additional meeting of the Monetary Policy Committee on November 3 in accordance with certain provisions of the RBI Act. The meeting is in addition to the existing schedule of MPC meetings for the current financial year.

The announcement of an additional meeting of the MPC has sparked market speculation that the rate-setting panel could be gearing up to announce an off-cycle rate hike as it had done in May. Some of the market chatter stems from the fact that the meeting on November 3 comes a day after the US Federal Reserve is scheduled to detail its policy statement in which a rate hike is likely.

However, the wording of the RBI’s press release and the fact that it comes after the official failure of the MPC on its inflation mandate suggests that the meeting on November 3 is one that is purely being held in line with processes to be followed in the event of failure to meet the inflation target.

As such, the meeting is likely to be one in which the MPC will decide on the RBI’s response to the government for failing to achieve its inflation mandate.

In its press release, the RBI said that the meeting on November 3 was being held under the provisions of Section 45ZN of the Reserve Bank of India Act 1934, along with Gazette notifications dated June 27, 2016 and March 31, 2021 and the Regulation 7 of the RBI Monetary Policy Committee and Monetary Policy Process.

According to the relevant Gazette notification and regulations, certain processes are listed out in the event of the MPC’s failure to meet its inflation target.

“The Secretary to the Committee shall schedule a separate meeting as part of the normal policy process to discuss and draft the report to be sent to the Central Government under the provisions of Section 45ZN of the Act,” the Gazette read.

“The Report shall be sent to the Central Government within one month from the date on which the Bank (RBI) has failed to meet the inflation target. The Bank shall send the report to the Central Government in the event of a failure to achieve the target as specified by Rules of the Central Government, in this regard,” it read.

Data released on October 12 showed that Consumer Price Index-based inflation had been outside of the MPC’s mandated 2-6 per cent band for three successive quarters, resulting in the failure to achieve the inflation target.

According to the RBI’s Monetary Policy Framework, in the event of failure to meet the inflation target, the central bank’s report shall include the reasons for failure, remedial actions proposed to be taken and a time-frame within which inflation shall be brought back to target. The inflation target is 4 per cent while the tolerance band is 2-6 per cent. The central bank has recently indicated in media interactions that it will take around two years for inflation to head back to 4 per cent.

Another factor that distinguishes the meeting on November 3 from earlier instances of the MPC acting on interest rates outside of the schedule is the fact that the RBI made the announcement before the meeting was held.

In May 2022 and in earlier instances, the RBI had not disclosed that off-cycle meetings were being held. It had only announced rate actions after the meetings had concluded. Moreover, the off-cycle meetings that have culminated in rate actions have typically been three-day meetings as is the MPC’s usual practice.

“There is a strong baseline view that this is just a formality to finalise the letter which they then need to send to the government. This is as per the rules in the Act. This is not a three-day meeting either, this is a one-day meeting,” Abhishek Upadhyay, senior economist, ICICI Securities Primary Dealership, told Business Standard.

“It’s a one-day meeting, it’s as per the rules of the Act and even fundamentally, there’s no reason to really panic. At that time, in May, we were at the very start of the rate hike cycle and there was a perception that the RBI was behind the curve. That is not the case right now. Whichever way you cut it, the probability of a rate action in this meeting looks very, very low,” he said.

Since May 4, 2022, the RBI has hiked the repo rate by a total of 190 basis points to 5.90 per cent.