MPC meeting: Reserve Bank of India unlikely to take surprise rate decision this week as inflation risk clouds darken: SBI | Rare Techy

An unscheduled meeting of the Reserve Bank of India-led rate-setting board this week is unlikely to produce any surprises with an off-cycle rate hike, even though it comes a day after the Federal Reserve’s policy decision and as unseasonal rains on the third Asia’s largest economy. increases the threat of inflation.

The meeting on November 3 is about preparing an explanation for the fact that the central bank did not meet the inflation target for three consecutive quarters.

“The unscheduled meeting on November 3, November 22, which was recently announced, is only part of the regulatory mandate (to keep inflation within the band for three straight quarters) and we do not believe that the next agenda in this meeting, against market expectations of a low chance of a rate hike as the meeting is scheduled a day after the Fed meeting on November 2,” Soumya Kanti Ghosh, group chief economist at State Bank of India, said in a note. research said.

Failure explanation process

India’s retail inflation hit a five-month high of 7.4 percent in September, the third straight quarter in which the average inflation rate remained above the RBI’s tolerance level of 6 percent and it was the average target for three years. 4 passed.

As mandated by law, the RBI has to explain to the government the reasons for its failure to meet the 2-6% mandate and the remedial measures to rectify it.

‘The letter between the Reserve Bank and the government is a privileged communication… For our part, we will not disclose it.’ Having said that, RBI Governor Shaktikanta Das has given every hope that we can hear the inside story of why the central bank and the Monetary Policy Committee (MPC). However, thanks to the law, we may get a good peak this Thursday.

According to Article 45ZN of the RBI Act, the central bank has to state in a report to the Central Government the reasons for not achieving the inflation target; remedial actions proposed by the Bank; and a time-frame estimate within which the inflation target will be achieved subject to the timely implementation of proposed remedial actions.

Also, as per Regulation 7 of the RBI MPC and the Monetary Policy Process Regulations, 2016, a separate meeting has to be scheduled by the Secretary of the Committee as part of the normal policy process to discuss and draft the report. sent to the Government, notes the SBI.

The report must be submitted to the government within one month of the date the Bank failed to meet the inflation target. Therefore, the RBI has to submit the report before November 12 as the inflation data for September was released on October 12.

Risk of inflation


High inflation has been a concern for central banks around the world, including India, as the unpredictable nature of the Russia-Ukraine war has complicated a supply-side disruption in a post-pandemic world struggling to recover from economic shocks. did

The recovery was accompanied by a rise in global commodity prices as pent-up demand outweighed supply. The onset of the conflict aggravated the commodity cycle and almost eliminated the supply chain of important commodities such as coal, metals, edible oils, and crude oil, the latter two of which are India’s primary and main imports.

The country’s largest bank said in a research note today that unseasonal rains affecting kharif crops are now another threat to inflation. Along with grains, prices of vegetables, milk, pulses and edible oils, which account for a quarter of the overall CPI, are rising and are likely to remain high in the coming months, the SBI said.

India’s October rainfall was 44% of normal, the three-month average food CPI was 10.9% against 4.9% in the previous 3 months. This suggests that unseasonal rains may have a major negative impact on food inflation in the coming months, it added.

“In 2019, when unseasonal rains occurred, average food prices doubled from 4.9 percent to 10.9 percent. Currently, September food inflation is 8.4 percent and a trend similar to that in seen in 2019, could push headline inflation to 7.5 percent in December,” SBI said. “This could lead to RBI’s inflation forecasts and market consensus. It could also mean that the terminal repo rate is still hard to fathom at this time, although consensus pegs it at 6.5%.”

Consider increasing speed for ease of use?

To curb inflation rates across the world, major central banks and India have simultaneously raised rates.

India’s Monetary Policy Committee has moved 190 basis points to hike the key policy rate since May, bringing the repo rate back to pre-Covid levels, while the Federal Reserve has opted for 75 bps rate hikes in each of the last three meetings. Borrowing costs in the world’s largest economy have risen since 2008.

However, many now believe that the Fed’s rate hikes after November will be slower than expected. An ECB guidance and a Bank of Canada rate hike confirm that such market optimism may not be entirely unfounded, the SBI said.

US GDP growth was stronger than expected and the wage-price spiral is starting to ease as the latest reading of the US Labor Cost Index shows a sharp slowdown in private sector wage growth. Consumer spending, which accounts for more than two-thirds of US economic activity, also slowed.

“All this for mid-December is 75 bps with a much lower probability (a 65% chance), with the story of a 50 bps hike now holding the pole position. Against this backdrop, the recent MPC minutes in India suggest some members. for looking for an early end to the rate hike cycle.”

A December rate hike by India’s rate-setting board is still widely expected. However, analysts are divided on the next rate hike, with some seeing another 35 bps hike in December and others saying the next rate move will be data dependent.

Also, there is a lot of uncertainty now that there will be unanimity in the political meetings as well as on the decisions to be made in their meeting on November 3, because different views were shown in the protocols of the last meetings.

In September, a member voted against the decision to raise the repo rate by 50 bps, and there were differences on the decision in the August meeting.

Turning to what might come out of the November 3 meeting, the SBI reminds us that looking at past unscheduled meetings of the MPC in March 2020 and May 2022, there were no previous press releases for such meetings. and the announcement of the rate decision was not planned. true meaning.

Separately, the RBI has mentioned in its Monetary and Economic Report (2020-21) that in the case of India, default may be redefined to include upper or lower tolerance bands of around goal for four consecutive fours. a quarter