New Delhi: 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 percent 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 percent by January 2016. The target of financial year 2016-17 and all subsequent years shall be four per cent with a band of (+/-) 2 percent," 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 percent.
"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 percent 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 percent.
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 percent for three consecutive quarters for the financial year 2015-16 and all subsequent years or if it is less than 2 percent 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 percent in January, from 4.28 percent in December. This takes into account the change in base year for measuring inflation to 2012 from 2010.
