One year gone, one more to go on RBI's post-failure path to 4% inflation

The Reserve Bank of India is deemed to have failed to meet its price stability mandate if inflation is outside the 2-6 percent tolerance range for three quarters in a row – as was the case in the first three quarters of 2022.

Exactly one year ago, on November 3, 2022, the Monetary Policy Committee (MPC) met outside its schedule to discuss and draft a report the Reserve Bank of India (RBI) would have to send to the central government "under the provisions of Section 45ZN of the RBI Act, 1934 and Regulation 7 of RBI MPC and Monetary Policy Process Regulations, 2016". This legalese referred to the 'letter' the RBI had to submit to the government following its failure to meet the inflation mandate.

The RBI's failure was confirmed by the September 2022 inflation print of 7.41 percent. While a mere formality by then, the Consumer Price Index (CPI) inflation number for that month – released on October 12, 2022, just days after the MPC had announced its decision to hike the policy repo rate by 50 basis points to 5.90 percent – meant inflation had stayed outside the RBI's tolerance band of 2-6 percent for three consecutive quarters.

Also Read: We should accept 4-5% inflation for several quarters, says MPC's Jayanth Varma

As a result, the MPC had to quickly assemble, discuss, and shoot off a report to the Centre detailing the reasons for failure, the remedial actions the RBI proposed to take, and an estimate of the time period within which inflation would return to 4 percent on a durable basis.

The three commandments

Of the three aspects mentioned above, two have been pretty clear – the reasons for failure and the time period within which the RBI hopes to return inflation to target.

When asked what the RBI said in its 'letter' days after the MPC's November 3 meeting, Governor Shaktikanta Das had said last year that anybody could make an intelligent guess about some of its contents.

"I have spoken about it on several occasions…where I have explained why inflation went up in India," Das had said in November 2012.

As for the remedial measures, the last financial year was all about it, with the repo rate being raised by 250 basis points to 6.5 percent.

One basis point is one-hundredth of a percentage point.

Also Read: Rate cuts not on the agenda at the moment, says RBI Governor Das

The third aspect, the time it would take inflation to fall to 4 percent, was less apparent. But RBI officials repeatedly mentioned last year how two years was an appropriate timeframe for inflation to be brought down to the medium-term target.

If one was to be slightly lenient to the RBI and take the MPC's November 3, 2022, meeting as the beginning of the journey to a 4 percent inflation level, we are now halfway to the two-year mark.

The two-year horizon

So, is the RBI on track to meet its timeline?

The easiest way to answer this question is by looking at the RBI's forecasts, which say that inflation will average 4.3 percent in January-March 2025. But before that, it could fall below 4 percent, with inflation seen averaging 4.5 percent in 2024-25 in a range of 3.8-5.2 percent. That 3.8 percent number could be hit in July-September 2024, thanks to a rather favourable base effect.

The real question here is whether this would count as inflation being lowered to the target on a durable basis. One must not forget that it has already completed four full years above 4 percent – no wonder the "emphatic" reiteration of the target in recent months.

Over the last three-and-a-half years, inspirational quotes from global leaders, primarily Mahatma Gandhi, have repeatedly found their way into Governor Das' post-policy statements. But were he to be speaking today, Das might have quoted from a Bon Jovi song – just as a Supreme Court Justice wrote in a recent judgement – and said we are halfway there. The ongoing uncertainties – both global and domestic – mean we might be living on a prayer, but the RBI swears we will make it to 4 percent.