Policy transparency: Report on missing inflation target must be released

The publication of a discussion paper on the monetary policy framework — by the Reserve Bank of India (RBI) in August — has sparked a lively debate, including on these pages. Various aspects of the framework were also discussed at the annual Business Standard BFSI Insight Summit last week, in a panel featuring two former external and two former internal members of the Monetary Policy Committee (MPC). The panel agreed that the framework had worked for India and there was no need for change at this stage. The inflation target is due for a review by March next year. Although there are minor differences on some technical aspects of the framework, most economists agree that the headline inflation target of 4 per cent, with a tolerance band of 2 percentage points on either side, should be retained for now.

 

Interestingly, one important aspect of the framework that has not received much attention came up in the panel discussion. The RBI Act mandates that when the central bank fails to meet the inflation target, it needs to send a report to the central government, stating the reasons for failure, the remedial action it proposes to take, and the timeframe within which the central bank would achieve the target with the proposed policy action. The RBI is seen to have failed to achieve the inflation target if the average inflation rate remains outside the tolerance band for three consecutive quarters. The RBI sent one such report to the central government in 2022 after the inflation rate remained above the upper end of the tolerance band for three consecutive quarters. However, the report has not been made public. It has been argued that the law does not require doing so. While that may be the correct legal position, withholding it is not in line with the spirit of India’s flexible inflation-targeting framework.

 

The framework has been designed to make the monetary policy transparent. For instance, the law mandates even the publication of the MPC meeting calendar well in advance. The MPC’s resolution is made public, along with details of how each member voted, and the minutes of the meeting are also released a few days later. The law mandates the RBI to publish a Monetary Policy Report every six months, detailing the sources of inflation and providing forecasts on how it is expected to evolve in the coming quarters. Besides, after every MPC meeting, the RBI governor, along with deputy governors and others, takes media questions at length, and they are not limited to the MPC decisions.

 

Thus, in the broader context, it is reasonable to expect that a report on failure to achieve the inflation target by an inflation-targeting central bank should be made public. According to the law, the RBI is expected to submit it to the central government. So, it is for the central government to decide. The BFSI Insight Summit panel was also of the view that the report must be made public. One apprehension in this regard could be that it might contain information that could move financial markets. The counterargument could be that the RBI’s road map could help financial markets adjust. If the policymakers don’t agree with the latter view, the report can be released after a reasonable gap. It will help policy discussion and further strengthen the idea of transparency in conducting monetary policy.