By Anirban Nag
India’s central bank may have to propose raising interest rates if inflation holds above its target for a third straight quarter, prompting monetary and fiscal policy makers to double down on efforts to keep prices in check, according to a person familiar with the matter.
Headline inflation has stayed above 6 per cent for the past two quarters, and breaching that level during the January-March period would require the Reserve Bank of India to inform the government in writing why its Monetary Policy Committee failed to meet its goal of keeping price-growth within the 2 per cent-6 per cent band mandated by law.
The central bank would also be required to suggest remedial action, which in this case would be to raise interest rates to douse price pressures, the person said, asking not to be identified as the deliberations are private. Any rate hike proposed as a remedy risks snuffing out a nascent recovery in Asia’s third-largest economy, the person said.
India’s law also requires the Reserve Bank of India (RBI) to give an “estimate of the time period within which the inflation target shall be achieved” after remedial actions have been put in place.
A spokesperson for the RBI wasn’t immediately available for a comment. The Ministry of Finance declined to comment.
The RBI kept rates steady last week for a fourth straight meeting to support growth, while separately announcing a plan to sap excess liquidity it had allowed as part of measures to counter the impact of the pandemic. The government of Prime Minister Narendra Modi, for its part, has cut custom duties on items like pulses, edible oil and oilseeds to help ease some of the price pressures.
Consumer prices for January are expected to have risen 4.4 per cent, according to the median estimate in a Bloomberg survey before data to be published Friday. That would be the second month within the RBI’s range after December’s 4.59 per cent increase.