1. After 2 decades, RBI, PM Narendra Modi govt agree to historic change in policy, set inflation target of 4 per cent

After 2 decades, RBI, PM Narendra Modi govt agree to historic change in policy, set inflation target of 4 per cent

The changes bring closer to reality a goal pursued relentlessly by RBI Governor Raghuram Rajan, who has said inflation targeting...

By: and | New Delhi | Updated: March 17, 2015 10:39 AM
Governor Raghuram Rajan's Reserve Bank of India (RBI) will be deemed to have missed its target if consumer inflation is at more than 6 percent.

Governor Raghuram Rajan’s Reserve Bank of India (RBI) will be deemed to have missed its target if consumer inflation is at more than 6 percent. (In picture: RBI Governor Rajan and PM Narendra Modi)

Governor Raghuram Rajan’s Reserve Bank of India (RBI) and the PM Narendra Modi-led Bharatiya Janata Party (BJP) government at Centre have agreed to the biggest change to monetary policy since opening up of India’s economy more than two decades ago, by introducing inflation targetting to rein in a long history of volatile price rises.

In a document dated February 20 but published on the Finance Ministry website on Monday, the two sides set a consumer inflation target of 4 per cent, with a band of plus or minus 2 percentage points, by the financial year ending in March 2017.

The Reserve Bank of India (RBI) will first aim to have consumer inflation fall below 6 per cent by January 2016. (Monetary Policy Framework Agreement: Read full report)

The changes bring closer to reality a goal pursued relentlessly by RBI Governor Raghuram Rajan, who has said the inflation targeting, more commonly seen in developed economies, was also vital in India.

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The central bank will be deemed to have missed its target if consumer inflation is at more than 6 percent or at less than 2 percent for three consecutive quarters starting in the 2015/16 fiscal year, the document also showed.

The RBI’s governor will determine the country’s key interest rates or any measures needed to achieve that inflation target. There was no mention in the document of a long-expected Monetary Policy Committee, though that is expected to be introduced at a later date.

Finance Minister Arun Jaitley had said on Saturday the government and the RBI had agreed on a new monetary policy framework and promised to change the RBI Act, which is required to implement the changes.

Consumer prices rose an annual 5.11 percent compared with a 4.28 percent gain in December, according to data issued on February that changed the base year for measuring inflation to 2012 from 2010.

Raghuram Rajan, rbi, Raghuram Rajan rbi, reserve bank of india A file photo of Raghuram Rajan, who became RBI chief in September 2013. (PTI)

FACTBOX: India introduces inflation target in key policy overhaul

The PM Narendra Modi government and Governor Raghuram Rajan-led Reserve Bank of India (RBI) have agreed an overhaul to monetary policy that will be the most significant in a generation, with changes that include an inflation target from the fiscal year beginning in April.

Following are key features of the document published on the finance ministry’s website on Monday:

POLICY DETAIL  

* India’s monetary policy framework will be operated by the central bank.

* India’s monetary policy framework will aim to “maintain price stability while keeping in mind the objective of growth”.

INFLATION TARGET

* India’s central bank will aim to bring inflation below 6 percent by Jan 2016.

* Consumer inflation target for 2016/2017 and subsequent years will be 4 percent +/-2 percentage points.

MISSING THE TARGET

* India central bank shall be seen to have failed to meet its target if inflation is more than 6 percent for three straight quarters in 2015/16 and subsequent years.

* From 2016/17, it will also be seen to have missed its target if inflation is below 2 percent for three straight quarters in 2016/17 and subsequent years.

EXPLAINING THE MISS

* If the central bank misses the inflation target, it will send a report to the government citing reasons and remedial actions. * The central bank will also need to give an estimated time-period within which it expects to return to the target level.

COMMITTEE

* The change is expected to include the introduction of a Monetary Policy Committee, but there was no detail on that in the document released on Monday.

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Monetary policy to now target inflation, to be 6% by Jan 2016

(PTI) The Finance Ministry and the Reserve Bank have agreed to inflation rate targeting under which the apex bank will aim to lower retail inflation to 6 per cent by January 2016 and further to around 4 per cent by March next year.

The monetary policy framework agreement as signed on February 20 is to “primarily maintain price stability while keeping in mind the objective of growth”.

“The Reserve Bank will aim to bring inflation below 6 per cent by January 2016. The target of financial year 2016-17 and all subsequent years shall be four per cent with a band of (+/-) 2 per cent,” the agreement said.

While the agreement gives a free hand to the RBI Governor to decide on the monetary policy measures to achieve the inflation target, it also requires the RBI to give out to the Central Government a report in case the target is missed for a period of time.

The RBI is also required to make public every six months a document explaining the sources of inflation and the inflation forecast for the period between 6-8 months.

In the Budget, Finance Minister Arun Jaitley had said a monetary policy framework would be put in place to keep inflation below 6 per cent.

“To ensure that our victory over inflation is institutionalised and hence continues, we have concluded a monetary policy framework agreement with the Reserve Bank of India. The framework objective is to keep inflation below 6 per cent and we will move to amend the RBI Act this year and provide for monetary policy committee,” he had said.

Retail inflation in January stood at 5.11 per cent.

The agreement as posted on the website of the Finance Ministry gave two criterias under which RBI would be deemed to have missed the target for inflation.

If the inflation is more than 6 per cent for three consecutive quarters for the financial year 2015-16 and all subsequent years or if it is less than 2 per cent for three consecutive quarters in 2016-17 and subsequently– then it would be seen as RBI having failed to meet the set target.

If it fails to meet it, the RBI in a report to the Government would give out the reasons for its failure, remedial actions proposed to be taken and an estimated time period within which the given target would be achieved, the document said.

In case of any dispute arising out of interpretation of the agreement, it would be resolved through a meeting between the RBI Governor and the Central Government, it added.

The Consumer Price Index (CPI) based inflation rose to a 5.11 per cent in January, from 4.28 per cent in December. This takes into account the change in base year for measuring inflation to 2012 from 2010.

narendra Modi, bharatiya janata party, bjp news, raghuram rajan, inflation targetting

Narendra Modi govt’s inflation targetting drive to rein in a long history of volatile price rises. The changes bring closer to reality a goal pursued relentlessly by RBI Governor Raghuram Rajan. (PTI)

 

  1. R
    Ritha Khemani
    Mar 2, 2015 at 6:26 pm
    Finally the RBI has come into the modern world of central banking. But the current target is pretty liberal . A fair amount of food inflation in India is structural, being due to distribution weaknesses and needs government measures to control, so inflation targeting is indirectly Jaitley's responsibility as well. Perhaps this is why a relatively high number of 6 percent was chosen.
    Reply
    1. A
      aaaa
      Mar 6, 2015 at 12:20 pm
      87% of s think that cutting interest rates will bring inflation down to 4%...... this is the ing reason why India is doomed. Get some basic sence of economics voting clueless.
      Reply
      1. B
        b k
        Mar 3, 2015 at 12:59 pm
        inflation has become a state of mind in our country where people are spending more on mobile phones than basic requirements. Instead of tightening the interest rates the government and RBI collectively should look at supply side and spur industrial and agricultural growth to improve it. If supplies improve, inflation will come down automatically. After so much fall in crude and fuel prices, freights have not become cheaper. This aspect should also be looked into. the administration should see that the benefit of lowering of inflation is ped on to the consumers. The government should come down heavily on ders and black marketeers.
        Reply
        1. B
          BRAJESH KUMAR
          Mar 2, 2015 at 6:53 pm
          Good idea. Sir please state bank of India ke business facilater ke bare me bhi kuchh kijie.
          Reply
          1. Avinash Chaudhary
            Mar 3, 2015 at 3:25 pm
            Test of the pudding lies in eating and not in the recipe. People are not interested in knowing who and how how it has failed. The responsibility of failure or success squarely lies with the government. Some of these things look like efforts to create alibi.
            Reply
            1. H
              HF
              Mar 2, 2015 at 6:55 pm
              Continue with an interesting read:
              Reply
              1. H
                HF
                Mar 2, 2015 at 6:57 pm
                Here is an interesting, contributing read: himalayanfund.blogspot.nl/2015/03/steady-markets-but-positive-vibes
                Reply
                1. S
                  Shaheen
                  Mar 3, 2015 at 2:40 pm
                  Its useless or to say "Kaan ko Iss Hath say ya us hath say Pakadna" Reason is simple, World economics is very Volatile and None can say for sure how its going to shape for next few years till some sort of stability is there. US$ being the main player in world economy is itself in shambles, China & an who are the biggest lenders to US are also facing their Downside and can't afford to lend more Unless they don't burden their already fragile economies. Gold is Shaky since last couple of years. Oil which is biggest contributor for indian economy is at HIGH Risk Zone not only for india but for the world. Too may things.... Hard to control unless effective "Cost Cutting Schemes" are not introduced Spending minimized Infrastructure needs to be revamped Generation of revenue thereby creating jobs and Money is rotated/Spent
                  Reply
                  1. J
                    joseph
                    Mar 4, 2015 at 11:10 am
                    After 2 decades ? R u high ? They haven't even completed there 1st year.
                    Reply
                    1. Dvincent Raj
                      Mar 3, 2015 at 12:07 pm
                      Modi can get Rs.29 meal.but People from Kashmir to Kanyakumari Meal Rate is between Rs 50 to 100 even more at high cl hotels. Essential commodities rates for common man is higher.Bread pieces will not satisfy hunger but full loaf for people will be the "basics of life" .On check in Essential commodities will will reduce inflation. D.Vincent,Tuticorin
                      Reply
                      1. Mallikarjun Iyyer
                        Mar 2, 2015 at 5:23 pm
                        goodu idea. we will more proactive central bank and sensitive government. could prove a major shift and change in macros.
                        Reply
                        1. N
                          Neeraj
                          Mar 2, 2015 at 5:25 pm
                          Reduction in interest rates an absolute must to spur growth. Otherwise this effort will be futile.
                          Reply
                          1. Rajagopalan Iyer
                            Mar 3, 2015 at 2:17 pm
                            I believe without touching the basics, all economists are beating the bush. They doll out all concessions to the farmers. Is there a difference between poor and rich farmer? All concessions are cornered by the rich farmers also. When will the Govt. identify the rich ones and deny them the concessions they do not deserve?
                            Reply
                            1. R
                              rocky
                              Mar 3, 2015 at 11:22 am
                              All over the world, economies of Europe/an/USA get alarmed at inflation at 2%. Here we have no real calculation. Just your household people, your mom/wife etc. who make everyday needs from the market and they will tell u how the price rise of essential items affect them. A price rise of rupee one in milk and rupees five in vegetables, rupees ten in grain does not affect Mr Raghu Rajan or PM Mr Modi who can get his meal at Rs.29/- and unlimited. Neither it affects the high earning families. It is the middle cl which has one or two earning member supporting four other family members who are hurt most. In the lowest income group, children dont go to school. Even if they do, they try to help family by doing odd jobs/services like distributing newspapers/milk early morning, selling veggies etc.
                              Reply
                              1. R
                                rocky
                                Mar 3, 2015 at 11:14 am
                                The entire calculation of inflation devised by previous UPA govt is misleading. White goods such as LCD/LED TV, Mobile phones, Comr etc were added to item list. Cost of these items have been reducing every month. But do people purchase these every day? No. People have to purchase grains, milk, vegetables, medicines etc everyday whereas white goods listed above are a luxury purchased once a year may be. By balancing the increased cost of grain,veggies, milk, medicines with decreasing cost of while goods the govt gives you an inflation of 6% whereas your everyday purchase price of essential commodities have really gone up by anywhere between 12 to 20%. For this reason, you bank FDs' which give you roughly 9%, in reality give you -3% return and this is why people invest in gold and land which keeps pace with real inflation.
                                Reply
                                1. S
                                  Sadasivan
                                  Mar 2, 2015 at 8:24 pm
                                  Cost of living is the correct basis [that i a STRONG Rupee]."Fake Inflation targeting" ,IS imitation OF THE US FEDERAL RESERVE AND OTHER DEVELOPED ECONOMIES.Actually,India experiences Hyper-Inflation from 2008,due to the mive stimuli and a very weak Rupee,despite HUGE QE by the US federal reserve.. And jaitley has started his own stimuli via tax reduction of 5% in a few years.This will weaken the Rupee.So also the Fake LOW Inlfation. Hence one may expect the same as in the developed economies,namely:- 1.Huge debt 2.QE to cancel the Debt 3.ZIRP,NIRP and low interest rate regime to service the Debt Items 2 an 3 above are confiscation of the wealth of the Citizens to cancel the debt. Hence Indian Citizens are in for trouble.
                                  Reply
                                  1. S
                                    SJ
                                    Mar 3, 2015 at 1:14 pm
                                    Please be aware that a commodity basket is prepared for all items that households consume and equal weightage is not igned to all. One of the factors used to determine the weightage is frequency of purchase. So the calculation factors in the fact that people dont buy these things daily. Do you think that people who define these formula are ? or you are trying to run some propaa as most of common people dont understand these things are followed by comments made by people like you.
                                    Reply
                                    1. S
                                      Siraj Ali
                                      Mar 3, 2015 at 1:34 pm
                                      What RBI can do to control the inflation, inflation is superficial and controlled by Back Marketers and ders, govt should work on breaking the monopolies and cartels indulged in wrong trade practices.
                                      Reply
                                      1. S
                                        Sri
                                        Mar 3, 2015 at 1:02 pm
                                        Vincent, why you keep talking about Rs 29 lunch? This lunch was same during Man Mohan Singh regime too. At least PM ate it for the first time ever in the history. Wait, hold on, this PM is committed to doing something better for this country and definitely will not leave it in the hands of Missionaries.
                                        Reply
                                        1. K
                                          krishnan
                                          Mar 3, 2015 at 2:23 pm
                                          It is daring initiative by both the Govt. and the RBI Governor, especially the RBI Governor. Mr. Raghuram Rajan has taken a real challenge and I wish him all the very best in efforts. It may also be mentioned that achieving the targeted Inflation rate will be possible only if all the consuents and the public at large strive for it. It may be pointed out that by achieving the targeted rates, our economy is bound to benefit nationally and internationally. Let us all support the RBI Governor's initiative.
                                          Reply
                                          1. K
                                            krishnan
                                            Mar 5, 2015 at 2:31 pm
                                            Dear Mr. Joseph, What they have meant the Economy having opened up globally over 2 decades back in a big way. However, many countries had adopted the Inflation targeting more than 20 years back. May be that India could have the people who can adopt this policy only now or may be that current situation might be the right time after considerable effort having been put in to rein the inflation. However, it is a daring strategy, which one has to admit. S R Krishnan
                                            Reply
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