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RBI MPC Meeting: Don’t Panic! Today the Reserve Bank will not increase the repo rate, know why the meeting is being held then?

Highlights

Inflation is still above the limit set by the central bank.
Inflation in India averaged 7 per cent in the July-September period.
Despite the tightening in monetary policy, inflation is more than the prescribed limit.

New Delhi. There will be an unscheduled meeting of the Monetary Policy Committee (MPC) today. As soon as the information about the MPC meeting came to the fore, the discussion of increasing the repo rate has started once again. However, the meeting of the Monetary Policy Committee to be held today has nothing to do with the repo rate. There will be no discussion on interest rates in this meeting.

Today’s meeting of the Monetary Policy Committee has been kept to inform the government about the failure of the central bank to control inflation. Therefore, there is no need for the common man to panic from this meeting. In the year 2022, RBI has increased the interest rate by 190 basis points in 4 meetings of its Monetary Policy Committee. Despite the increase in the repo rate, inflation is still above the limit set by the central bank.

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clear agenda
Moneycontrol According to a report, the meeting of the MPC to be held today has been called under two sections. The first is Section 45ZN of the Reserve Bank of India (RBI) Act, 1934. Under this section, the meeting of the MPC is called when the RBI fails to meet the inflation target. In India, inflation averaged 7 per cent in the July-September period, 7.3 per cent in the April-June quarter and 6.3 per cent in the January-March period. This is more than the 6 per cent limit set by the Reserve Bank of India.

When the inflation rate remains above the prescribed limit for three consecutive quarters, the RBI has to submit a report to the central government. In this report, the reasons for failure to achieve the target of bringing inflation within the prescribed limits are listed. In this report, the future efforts to reduce inflation are told, as well as the time frame to control inflation is also mentioned.

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The second provision under which today’s meeting has been held is Regulation 7 of the Monetary Policy Process Regulations, 2016. It said that the Secretary of the Monetary Policy Committee will hold a separate meeting as part of the general policy process with regard to the report to be sent to the government under Section 45ZN. In this the report will be discussed and its draft will be prepared. As per Section 45ZN of the Act, within one month from the date on which the bank has failed to meet the inflation target, a report about the reasons for this failure should be sent to the Central Government. Thus, both the provisions specify the circumstances under which the unscheduled meeting of the MPC has been called. It is clear from this that there will be no discussion on interest rates in the meeting called today.

Is RBI’s late action on inflation justified?
In his speech at the IBA-FICCI Banking Conclave, RBI Governor Shaktikanta Das vehemently defended the central bank’s strategy to rein in inflation. He said that the central bank did not want to affect the economic recovery by taking a quick stance against inflation. “If we had started the process of tightening earlier, what would have been the counterfactual scenario? What you withhold in the process does not get the appreciation it deserves. We have prevented the economy from slowing down.”

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However, many economists dismiss this argument of the Reserve Bank saying that if the bank had taken small steps early to check inflation, it would have had more impact. By doing this, the central bank does not have to increase interest rates so much in just five months. Frequent and large increases in interest rates can have a negative impact on the recovery of the economy. Monetary Policy Committee member Jayant Verma also wrote in the MPC Minutes released on October 14 that more tightening in monetary policy can stop the growth in economic activity.

RBI is also worried about this
No matter how true the RBI may describe its steps taken to contain inflation, the truth is that the failure of the central bank to check inflation has put a dent on its credibility and ability. This is the first time the RBI is facing such a situation since the inception of the MPC in 2016. The primary objective of RBI is to keep prices stable while maintaining growth. Now it will be very important to see what is the government’s reaction to the RBI report. It is believed that the apex bank may also recommend some fiscal measures to ease supply side constraints. How much the government accepts the RBI’s proposed remedial actions will be very important.

Tags: business news in hindi, Interest Rates, RBI, Rbi policy

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