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Unscheduled meetings, debates: Behind the scenes of the May 4 surprise RBI repo rate hike

The RBI's repo rate hike on May 4 caught everyone by surprise. But the central bank had started talks about convening its rate-setting panel right after its April 8 meeting

May 12, 2022 / 12:33 PM IST
Shaktikanta Das (file photo)

Shaktikanta Das (file photo)

The Reserve Bank of India is said to have started discussions on holding a Monetary Policy Committee meeting before the scheduled date of June 6 as soon as inflation data for March was released on April 12 – just four days after the panel had voted to leave the repo rate unchanged at 4 percent.

The data, which showed that the Consumer Price Index inflation surpassed forecast to a 17-month high of 6.95 percent in March, raised expectation that the RBI would increase the reverse repo rate, tighten its monetary policy stance, or even raise the repo rate at its June 6-8 meeting.

However, the RBI tweeted just before noon on May 4 that Governor Shaktikanta Das would be making a statement in a couple of hours, fuelling talks of a policy rate hike. The governor delivered, but more than expected, announcing that the MPC had met and voted in favour of a 40-basis-point hike in the repo rate.

"From the time the March inflation number was released, the six (MPC) members were talking to each other, asking if an early meeting was needed," a person aware of the developments said, requesting anonymity. "Only if there is a consensus does the MPC meet."

The RBI debated the optics of holding the MPC meeting as early as April 13. But such a move was seen as being "very, very backward," the person said.

Close

The MPC members held telephonic conversations and decided to wait until the views of the International Monetary Fund were available, with the multilateral agency's World Economic Outlook report due for release on April 19.

In its report, the IMF forecast India's CPI inflation at 6.1 percent in FY23, 40 basis points higher than the RBI estimate released on April 8.

The central bank is expected to raise its CPI inflation forecast in June. Currently, the RBI expects the CPI inflation to average 5.7 percent in FY23, although the MPC said in its resolution on May 4 that there were "significant upside risks" to the inflation trajectory announced in April.

New member

Another consideration that helped advance the MPC meeting to early May was the nomination of the central bank's newly minted executive director, Rajiv Ranjan, to the panel. The RBI's central board of directors met on May 2 and approved Ranjan as the MPC's third ex-officio member.

The three RBI representatives on the MPC are all ex-officio. While the first two are the governor and the deputy governor in charge of monetary policy, the third can be any officer of the RBI, as nominated by its board of directors.

Ranjan joined the MPC after his elevation to the post of executive director on May 1, with a nomination necessitated to fill the vacancy created by the retirement of Mridul Saggar at the end of April. Saggar served as a member of the MPC from August 2020 until last month's meeting.

"The RBI has a tradition of asking the head of the Monetary Policy Department or its executive director to be a member of the MPC. So, it waited for Ranjan's appointment," the person said.

The law does not require all six members of the MPC to be present to vote on the repo rate. The quorum is four.



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Siddharth Upasani
first published: May 12, 2022 10:54 am
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