InvestorQ : Why is the RBI convening a special meeting of the MPC on 03rds November and what is the agenda of the meeting?
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Why is the RBI convening a special meeting of the MPC on 03rds November and what is the agenda of the meeting?

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Arti Chavan answered.
1 month ago
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On Thursday, 27th October, RBI issued a press release announcing an additional meeting on monetary policy on 03rd November. Under Section 45ZI(4) of the RBI Act 1934 such a meeting has to be specially convened if the RBI misses inflation targets for a prolonged period. This time around, the RBI missed inflation targets for 3 quarters in succession. Here are referring to the outer limit of consumer inflation at 6%. Now, the RBI is obliged to provide a detailed report to the Indian government, explaining why it could not meet the inflation target and the measures it proposes to take as well as the timelines.

The RBI had embarked on an aggressive plan to cut inflation by raising rates aggressively the way the US Fed has also done. Since the special May 2022 meeting of the MPC, repo rates were hiked by 190 basis points from 4% to 5.90%. Indirectly, the RBI has also revised its terminal rate targets from 6% to 6.5% or even higher. The idea is that now with rate hikes not really working, it may be time to think about Plan-B.

The RBI has problems on two fronts. Firstly, CPI inflation breached the outer limit of 6% for 3 quarters in succession. In addition, the inflation has been above the average 4% inflation rate for the last 36 months. That surely warrants an explanation and an alternate action plan. Either the government and RBI are missing something or they need to keep a lot more patience like the US Fed is doing. However, it is not yet clear if the contents of the RBI report would be made public or is kept as classified information. One thing to debate is whether it still makes sense to keep pushing rate hikes even at the cost of growth.

There is one more interesting aspect about the inflation numbers and the MPC meeting date. The special meeting of the MPC is scheduled by the BRI exactly a day after the Fed statement is made late on 02nd November. For now, it looks like the Fed will announce another 75 bps rate hike. That is likely to create a huge gap in the RBI efforts and waiting till December to respond would be too late. The special meeting may also be used by the RBI to make some more rate adjustments to avoid the risk of substantial risk-off capital flows out of India. For now, it looks like the RBI may choose to remain hawkish.

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