Former RBI governor Duvvuri Subbarao.
The
Reserve Bank of India (RBI) may have to explain its likely failure on meeting the inflation target to the government by September,
Duvvuri Subbarao, a former governor of the central bank, has said.
“Should the prospect of a letter arise again by September, the RBI must see that as an opportunity to explain the challenges of navigating extraordinarily uncertain times,” Subbarao said in an
article published in Moneycontrol on May 10.
The RBI targets inflation at 4 percent with a tolerance level of two percentage points on either side.
According to the mandate, if average inflation stays above the target band for three consecutive quarters, the RBI has to write a letter to the government explaining the reasons for the failure to deliver inflation within the target band and the remedial action taken to get it back on target, Subbarao said in the article.
When a similar contingency was on the anvil during the lockdown in 2020, the "inflation target" was suspended to circumvent the letter being written. That was ill-advised, the former RBI governor said.
In fact, writing a letter would have given the RBI an opportunity to explain the challenge of managing a “black swan” event, he added.
India's retail inflation jumped to a
17-month high of 6.95 percent in March, staying above the upper band of the central bank’s target for the third consecutive month.
Inflation in April is also expected to come above 7 percent, according to economists. Elevated global commodity prices and disruptions in global supply chains are contributing to higher inflation.
The
Monetary Policy Committee (MPC), in an
unscheduled meeting on May 4, announced a 40-basis-point hike in the key lending repo rate and raised the cash reserve ratio (CRR) by 50 basis points. The move came in the backdrop of domestic retail inflation persistently staying above the central bank’s comfort zone. This is the first such unscheduled statement from the RBI governor since the start of the pandemic in 2020.
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