RBI's big focus to remain on combating inflation in upcoming MPC meet: SBI Ecowrap

The Reserve Bank of India (RBI) is likely to focus on bringing inflation within target levels and lowering it to around the midpoint. The upcoming Monetary Policy Committee (MPC) meeting will take place under Section 45ZN of the RBI Act. 

Under Section 45ZN of the RBI Act, the central bank has to send a detailed report to the central government if it fails to meet the inflation targets for three consecutive quarters. RBI defines failure to meet inflation targets as either overshooting or undershooting the upper and lower tolerance bands for four consecutive quarters instead of the present three quarters. 

This report focuses on reasons behind failure to achieve inflation target, remedial actions proposed by the bank and an estimate of the time-period within which the inflation target will be achieved. Since the inflation data for September 2022 was revealed on October 12, the RBI will have to submit this report to the centre before November 12, as per the latest SBI Ecowrap. 

The RBI also said in its recent bulletin that the fight against inflation will be “dogged and prolonged” given the geopolitical and epidemiological uncertainties and variable lags with which monetary policy operates. 

As per the SBI report, the central bank is also likely to hike the repo rate to 6.5 per cent in its upcoming MPC meeting on November 3. The MPC will take place a day after the US Federal Reserve meets on November 2. This MPC is purely focused on addressing the shortfall in meeting inflation targets for three successive quarters. 

“Currently the September food inflation is at 8.4 per cent and a similar trend like the one seen in 2019 can put headline inflation towards 7.5 per cent in December. This could put a spanner to the inflation projections of RBI and market consensus. This could also mean that the terminal repo rate could still be difficult to comprehend at this time, though consensus puts it at 6.5 per cent,” the Ecowrap report read. 

The frequent rise in repo rates has led to banks raising their external benchmark lending rates or EBLRs by 190 basis points (bps) whereas marginal cost of funds-based lending rate (MCLR) and base rates have risen by 50-70 bps only. 

The Ecowrap mentions, “We believe RBI is pushing banks to increase their deposit rates to garner more deposits or secured funds to finance their credit growth and this could be one of the reasons to keep the liquidity in deficit mode for an extended period.” 

Also read: RBI to hold additional Monetary Policy Committee meeting on November 3

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