Inflation target fixed at 4% for five years

In a move that champions the inflation-fighting policies of outgoing Reserve Bank of India (RBI) Governor Raghuram Rajan, the government on Friday announced an inflation target of 4 per cent, plus or minus 2 per cent. The monetary policy committee, which will be set up soon, will have to adhere to the target till March 31, 2021, or else the central bank will have some explaining to do.This RBI's monetary policy review on

August 9 could be the last one to set the repo rate. The notification, placed in Parliament by Minister of State for Finance Arjun Meghwal, has put to rest speculation over the inflation target. The government and the RBI had last year reached an agreement on a monetary policy framework that had set the inflation target at 4 per cent, plus or minus 2 per cent. However, there was no legal backing to it.

The government in June notified rules for setting up the monetary policy committee, giving effect to amendments in the RBI Act. The inflation target was not notified that time, fuelling speculation the government might change it.

Once the monetary policy committee is set up, it will set the policy interest (repo) rate with the objective of keeping inflation in this range. The RBI Act has been amended to state the primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth.

The monetary policy committee will have six members, RBI governor, deputy governor and a central bank officer, and three nominees of the Centre. The RBI governor will have a casting vote but no veto. RBI Governor Raghuram Rajan recently said the committee should be set up before he stepped down early next month. The move is seen as government approval of Rajan's inflation-first monetary policy.

Economic affairs secretary Shaktikanta Das told a TV channel on Thursday, "An announcement on RBI MPC members will be made very soon."

The notification says if average inflation strays from the band for three consecutive quarters the RBI will report to the government the reasons for the failure, remedial action, and a timeline for return to normalcy.

The band allows the monetary policy committee to target inflation over a business cycle and accommodates in the production of food, which has over 45 per cent weight in consumer price indices. The average quarterly consumer-price inflation has not crossed 6 per cent since 2015-16.

"Despite the shortcomings of consumer-price inflation as a target because food prices rarely react to monetary policy, we welcome the decision because this will impart continuity to policy," said Aditi Nayar, senior economist, ICRA.

RBI Governor Raghuram Rajan on Friday met Finance Minister Arun Jaitley. "I have no comments...We have a policy on Tuesday, so I have to wait till policy," Rajan told reporters when asked about the meeting. In a lighter vein, the outgoing RBI Governor said he was in "silent period", adding "(On) Tuesday, I will be able to talk."

INFLATION

RBI

RAGHURAM RAJAN

MONETARY POLICY

ARJUN MEGHWAL

REPO RATE

SHAKTIKANTA DAS

ECONOMY & POLICY

NEWS