InvestorQ : What do you expect to happen in the special RBI MPC meet on the 03rd of November 2022?
Khushi Patel made post

What do you expect to happen in the special RBI MPC meet on the 03rd of November 2022?

Dhwani Mehta answered.
4 weeks ago

It is a special MPC meet called by the RBI and the agenda would broadly be to discuss the reason for the RBI failing to contain inflation as well as any subsequent measures required to be taken to achieve the inflation target going ahead.

a) The special meeting of the MPC has been called for under Section 45ZI(4) of the RBI Act 1934. This is in specific light of consumer inflation or the CPI inflation overshooting the RBI targets on a persistent basis.

b) The meeting has been convened to discuss and debate the reasons RBI was unable to contain CPI inflation at the promised levels. CPI inflation overshot the median 4% inflation target for 36 months in succession while it has overshot the outer limit of 6% inflation for 3 quarters in succession. It is time for a review of the current approach.

c) As part of the special review meeting, the RBI is required to make a detailed evaluation of why their monetary measures could not effectively contain inflation. The RBI is also required to analyse the efficacy of various measures adopted for inflation control.

d) In addition, the RBI is also required to offer a Plan-B or an alternative plan of action with clear time lines on when and by how much inflation is likely to taper. For now, that does appear to be a rich expectation, especially when the Indian central banks is being reactive to what is happening in the world rather than taking proactive measures.

e) One thing to remember is that this report is classified information so not everything will come out in the public domain. But more than the report, the alternate measures should be more of greater interest.

f) However, MPC members like Jayanth Verma have pointed out that the RBI approach was always designed to give delayed results. For instance, the RBI started hiking the rates too late, nearly 2 months after the Fed started. Also, inflation is a global phenomenon and a lot of Indian inflation is imported. There is only so much that the RBI can do in this connection.

g) But the real shift needs to be in a more decisive stand. Statements like we will control inflation by hiking rate without affecting growth are vague and impractical. It has to be more decisive and conclusive. More so, since India does not have the luxury of unlimited funds to bankroll fiscal plans.

h) One likely outcome of this move is a rate hike as this meeting falls exactly a day after the Fed statement. In fact, that is what it may end up being. After all, waiting till December would mean too much risk of monetary divergence and possible impact on capital flows.