On the RBI's post-failure route to 4% inflation, one year has passed and one more remains

 On the RBI's post-failure route to 4% inflation, one year has passed and one more remains

The Reserve Bank of India (RBI) has said that it would be reasonable to cut inflation to four percent after two years, even if the contents of its "letter" to the government after it failed to fulfill its mission have not been made public. Maybe we are at the halfway point of that schedule.

When inflation falls below the 2–6% tolerance range for three consecutive quarters, as it did in the first three of 2022, the Reserve Bank of India is considered to have failed to satisfy its price stability objective.

To discuss and draft a report that the Reserve Bank of India (RBI) would have to submit to the central government "under the regulations of Section 45ZN of the RBI Act, 1934 as well as Regulation 7 of RBI MPC and Monetary Policy Process Rules 2016," the Monetary Policy Committee (MPC) convened outside of its scheduled meeting on November 3, 2022, exactly one year ago. This legalese was a reference to the 'letter' that the government required the RBI to produce after it failed to fulfill the inflation target.

The 7.41 percent inflation figure for September 2022 provided proof of the RBI's ineptitude. Although it was only a formality at the time, the Consumer Price Index (CPI) inflation figure for that month indicated that inflation had remained outside the RBI's tolerance band of 2–6% for a total of three consecutive quarters. The data was released on October 12, 2022, a few days after the MPC had made the decision to hike the policy repo rate by 50 basis points to 5.90 percent.

Consequently, the MPC was forced to convene, deliberate, and submit a report to the Center in a flash that included the reasons behind the failure, the corrective measures the RBI suggested, and an estimate of when inflation would stabilize at 4 percent.

The trio of precepts

Two of the three previously discussed factors—the reasons for the failure and the timeline the RBI expects to achieve to bring inflation back to target—have come to light rather clearly.

In response to a question on the contents of the RBI's "letter" after the November 3 meeting of the MPC, Governor Shaktikanta Das said in the previous year that anybody may reasonably infer certain things from it.

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

The previous fiscal year was all about the corrective measures, as the repo rate was increased by 250 basis points to 6.5 percent.

One tenth of a percentage point is equal to one basis point.

The third factor was less obvious: how long would it take for inflation to drop to 4%? However, RBI officials said again and again last year that two years was a suitable amount of time to bring inflation down to the medium-term objective.

We are already halfway through the two-year period if one were to be somewhat forgiving to the RBI and consider the MPC meeting on November 3, 2022, as the start of the trip to a 4 percent inflation threshold.

The next two years

Is the RBI on course to fulfill its deadline?

Looking at the RBI's projections, which state that inflation would average 4.3 percent from January to March 2025, is the simplest method to get an answer to this issue. However, it could drop below 4% before then, with inflation predicted to average 4.5 percent in 2024–2025, with a range of 3.8–5.2 percent. The 3.8 percent mark may be achieved from July to September of 2024 because of a favorable base effect.

Whether this would qualify as inflation being decreased to the goal on a lasting basis is the true matter at hand. Remember that it has already exceeded 4 percent for four full years; this explains the latest "emphatic" reiteration of the aim.

Governor Das's post-policy remarks have often included motivational sayings from world leaders, most notably Mahatma Gandhi, for the last three and a half years. However, Das may have added, "We are halfway there," using a Bon Jovi song, if he were speaking today, as a Supreme Court Justice recently said in a ruling. We may be living on a prayer because to the persistent uncertainty, both domestically and globally, but the RBI is adamant that we will reach 4 percent.