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.
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:
* 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”.
* 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.
* 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.
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.