Under the flexible inflation targeting regime, the monetary policy decision-making is vested with the Monetary Policy Committee (MPC), but its implementation falls in RBI’s domain.

The RBI now is accountable if the CPI inflation exceeds 6 per cent for three consecutive quarters and should report to the Centre for: (a) the reasons for failure to achieve the inflation target; (b) remedial actions proposed to be taken by the bank; and (c) an estimate of the time period within which the inflation target shall be achieved.

Since retail inflation has remained above 6 per cent consecutively for three quarters since January , the RBI for the first time has to send a report to the government.

RBI Governor Shaktikanta Das has said since the report is “privileged communication” the central bank will not make it public. Now which part of the report could be confidential that the stakeholders cannot visualise?

Reasons for failure

Globally, central banks have been explaining reasons for the recent breach of inflation target in their policy documents. Central banks saw inflation initially in terms of supply shocks and felt it was transitory.

The Russian-Ukraine war, which disrupted the supply of essential commodities, was a major reason for supply shocks. As most central banks delayed taking action against repeated supply shocks, inflation became generalised. The stimulus packages implemented during the pandemic are not being seen as a factor for the current inflation episode.

Apart from supply shocks and second-round effects, a mismatch between demand and supply in the post-Covid period may also be causing inflation.

While pent-up demand was released after Covid-related restrictions were scrapped, the supply response was inadequate despite low-capacity utilisation. The mismatch was worsened by the global growth slowdown.

Unfortunately, discretionary spending of the middle- and the upper-middle-classes was offset by sluggish demand by workers in the informal sector due to multi-speed recovery.

If the RBI sticks to the explanations given so far for high inflation persistence, then this part of the report is unlikely to be confidential.

The RBI cannot suggest any remedial measures independently without consulting the MPC as monetary policy decision-making is vested with it.

The RBI is fast approaching the level of a neutral policy rate, which may not be sufficient to control inflation unless the real policy rate becomes positive.

When forward guidance is perceived to be counterproductive due to prevailing uncertainties, can MPC propose stringent time-bound measures to control inflation? Also stringent measures may lose relevance if situations change dramatically.

Stakeholders will not be surprised if the MPC commits to taking state-contingent measures that are difficult to precisely spell out upfront.

The last part of the report is likely to contain RBI’s professional advice to the government about the time required to achieve the inflation target.

In a recent post-policy media interaction, the RBI Governor had indicated that retail inflation may be close to the target in a two-year cycle.

Based on certain assumptions, this part of the report is unlikely to be out of sync with the RBI’s latest inflation projection.

If growth impulses are maintained, even stringent measures can be implemented without any difficulty.

If growth falters, a consensus on stringent measures even if proposed is unlikely. If no specific measures are proposed, the report may lack credibility. Even if the RBI does not make the report public, the government may like to do so for stakeholders to form rational expectations.

The writer is currently RBI Chair Professor at Utkal University and former Head of the Monetary Policy Department, RBI. The views expressed are personal

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