RBI's MPC to explain first inflation miss since 2016 to government today

India’s monetary policy rate setters will meet on Thursday to write a letter to the government on why they failed to keep inflation within a 2%-6% mandated range for three straight quarters.
 

This is the first time the Reserve Bank of India is writing such a letter after the country switched to a flexible inflation-targeting regime and formed a committee in 2016 to set interest rates. The RBI must detail the steps its taking to bring inflation back to target, and those measures may provide a clue on the central bank’s policy rate path.

The off-cycle meeting has caused some anxiety among bond investors, especially since its comes hours after the Federal Reserve raised interest rates by 75 basis points for a fourth straight time and signaled that interest rates will go higher than earlier projected although the path may soon involve smaller hikes.

Most economists surveyed by Bloomberg earlier this week, however, don’t expect a rate action. Elsewhere in the region, the Philippines announced that it’s matching the Fed hike when it meets on Nov. 17 as it seeks to prop up a currency that has plunged to a record low while Hong Kong as expected moved in lockstep with the Fed.

Above Target
 

RBI’s letter won’t be immediately available to the public although the government may decide to release it later, Governor Shaktikanta Das, said Wednesday. Das defended the central bank’s decision not to raise rates even when inflation started climbing at the start of the year.

India’s consumer prices have risen above 6% since January, hitting an eight-year high in April. RBI started tightening a month later and has since raised the benchmark rate by 190 basis points after four consecutive increases that has taken borrowing costs to pre-pandemic levels. 

The rupee’s drop to a record low against the backdrop of an aggressive Fed tightening is also complicating RBI’s inflation fight. 

By not tightening earlier, the central bank prevented a “complete downward spiral” of Asia’s third largest economy that was just beginning to recover from the pandemic, Das said. “In the process there was a slippage in inflation targeting,” Das said. If the rates were raised earlier, “it would have been very costly for the economy.”

The RBI’s rate panel is scheduled to hold its next policy review for early December. The central bank expects price gains to fall back within the targeted range by the end of the fiscal year in March, as international commodity prices drop.