Opinion Why the RBI communication to government on the failure to meet inflation target must be placed in the public domain

On Wednesday, data released by the National Statistical Office showed that retail inflation, as measured by the consumer price index, rose to a five-month high of 7.41 per cent in September. Taking this into consideration, inflation has now stayed above the upper threshold of the Reserve Bank of India’s inflation targeting framework for three consecutive quarters. In fact, from April 2019 onwards, inflation has stayed above the upper threshold of the framework for around half the period. To tackle the inflationary pressures in the economy, the monetary policy committee has in response raised the benchmark repo rate by 190 basis points so far. While concerns are now being voiced about the growth sacrifice, the MPC must stay the course, continue to focus on preserving macroeconomic stability.

The disaggregated inflation data shows that food inflation has continued to edge upwards. The consumer food price index rose to 8.6 per cent in September, up from 7.62 per cent in August. It stood at 6.69 per cent in July. A sharp uptick was seen in cereals, vegetables, milk and spices in the month of September. Equally worrying, core inflation, which excludes the volatile food and fuel components, continues to remain elevated, driven by clothing and footwear, household goods and services, personal care and effects and recreation and amusement. As per the RBI’s most recent forecast, the central bank expects inflation to begin to trend lower in the second half of the year, falling to 6.5 per cent in the third quarter and thereafter to 5.8 per cent in the fourth quarter. But prices may well prove to be sticky on the downside. For one, low wheat stocks and uncertainties over the kharif rice crop on account of erratic and extended monsoon rainfall are likely to continue to impart upward pressure to cereal inflation.

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As per section 45 of the RBI Act, if the central bank fails to meet the inflation target, it will have to write to the government, laying down the reasons for the failure to achieve the target, the remedial actions it proposes to take and the estimated time period within which the target will be achieved. This communication forms an integral part of holding the RBI/MPC accountable for monetary policy decisions. However, RBI Governor Shaktikanta Das is reported to have said that the central bank will not place this report in the public domain as “it is privileged communication from the central bank to the government”. This may not be the correct approach. The Union government must place this communication in the public domain. Doing so will not only provide greater clarity on the trajectory of monetary policy, but will also ensure greater accountability and transparency in its making.