The Reserve Bank of India (RBI) governor will now write a letter to the finance ministry if average headline consumer price inflation stays above 6 per cent for three consecutive quarters, which will be over at the end of September, reported Business Standard.
The format is important because it will be a norm template for such kind of communication in future.
RBI Governor Shaktikanta Das will not be in direct communication with Parliament on the subject. Instead, it will be Union Finance Minister Nirmala Sitharaman who will decide whether to place the communication on the table of the House.
It means subsequent discussion, if any, in Parliament on the conduct of monetary policy under the RBI Act will be steered by the fiscal authority, the finance ministry.
“We only need to write a letter to the government, explaining the reasons for the high inflation and the other steps in accordance with the RBI Act,” said a high-level source at the central bank.
Inflation, as measured by the consumer price index (CPI), has remained above 6 per cent, the upper limit of the tolerance band, since January this year.
“Until December, the CPI is expected to remain higher than the upper tolerance level. Thereafter, it is expected to go below 6 per cent (in accordance with) our current projections,” the governor wrote in a media article in June.
To interpret the Act, an agreement on the Monetary Policy Framework, signed by the government of India and the RBI (signed by the finance secretary and the governor of the RBI), has been in operation since February 20, 2015.
It was renewed in 2021.
According to it, CPI inflation should be 4 per cent, give or take 2 per cent. If it exceeds 6 per cent for three consecutive quarters, the RBI has to provide an explanation.
Since a communication from the RBI under the Act is unprecedented, it is the finance ministry which has to decide on the subsequent steps.