RBI likely to assure government it will rein in inflation in FY24 – Times of India

MUMBAI: The RBI is likely to assure the government that inflation would be brought within the monetary policy committee’s (MPC’s) tolerance band by the fourth quarter and is likely to be reined in from FY24. The target is 4% with a tolerance of 2 percentage points.
The RBI is also likely to highlight the 190-basis point (100bps = 1 percentage point) repo rate hike that has been implemented since May, which will impact demand over the next six months.
The RBI in a statement said that the meeting of the MPC was held on Wednesday to discuss and draft the report to be sent to the government by the central bank. The regulation requires the RBI to send a report to the government highlighting the reasons for the failure to achi-eve the inflation target, remedial action proposed to be taken and estimate of the period within which the inflation target shall be achieved.

“The immediate target for the MPC would be to bring inflation within the 2% band to below 6%. The RBI has indicated in the past that this would happen by Q4FY23. Given the base effect there is a good chance that they will be ableto maintain it below 6% for FY24 given the advantage of the base effect,” said Madan Sabnavis, chief economist, Bank of Baroda.
While the RBI has highlighted the reasons why it failed to achieve the target, the remedial action is what the market is looking out for. “The RBI will have a good explanation on why inflation could not be maintained wit-hin the band. . . the increase in international oil prices and ban on palm oil exports by Indonesia. What would be interesting to see is whether the RBI will involve the government on inflation control and cite the need for tax reductions,” said Sabnavis.
On Tuesday, RBI governor Shaktikanta Das hinted that the communication is likely to be on the lines of what other central banks have been writing to their governments. “The Bank of England writes this letter every month for the last one year, there are other central banks that write similar letters. But in our country the inflation framework is pretty recent and was instituted only in 2016,” said Das.
“The RBI has been saying that bringing down inflation to the 4% level will take two years. The focus is likely to be on bringing it within the tolerance band,” said an economist.