Indian government helps central bank to circumvent inflation law

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The Indian government did not apply the law when the country’s central bank breached the 2020 inflation target, documents accessed by The Reporters’ Collective (TRC) and Al Jazeera through the Right to Information Act show.

The Reserve Bank of India (RBI), under Governor Shaktikanta Das, was unable to keep inflation within the legally mandated limit of 6 percent for the three consecutive quarters between January and September 2020.

Under Indian law, if the RBI fails to meet the inflation target for three consecutive quarters, it is required to write to the government within one month explaining why and produce a plan to bring prices back in line. This transparency is required to prevent businesses and citizens from losing faith in the RBI and the government’s ability to rein in inflation.

However, the Ministry of Finance, with finance minister Nirmala Sitharaman’s approval, gave the central bank a pass, documents show.

It suggested the official inflation figures for the specific period had been estimated under constraints of a pandemic-induced lockdown, and hence were not reliable enough to be used for setting the interest rate, the ministry informed the RBI.

But, records show, these numbers had been endorsed at all levels of the government and its statistical agencies and had been used by the government for all other economic assessments.

What the finance ministry was worried about, as internal documents showed, was that the central bank would start hiking interest rates to control price rises at a time when the administration favoured lower borrowing costs to revive the economy.

The finance ministry and RBI did not respond to a list of detailed questions sent by Al Jazeera.

As Prime Minister Narendra Modi put India into one of the world’s strictest lockdowns in 2020 to curb the spread of the coronavirus, inflation shot up on the back of supply shocks. In the process, the central bank missed its inflation target, a first since an independent monetary policy committee (MPC) under the RBI governor was set up in 2016. The MPC was tasked with keeping the inflation levels in check (see Part 1) by setting the interest rates at which it lends money to banks.

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