Rajan has all along been a strident advocate of inflation targeting. With this notification, the Centre has also moved ahead with its plans for the new Monetary Policy Framework.
“In view of the powers conferred by Section 45ZA of the RBI Act 1934, the Central government, in consultation with the bank, hereby notifies the inflation target beginning from the date of publication of this notification and ending on the March 31, 2021,” said the government notification tabled in the Lok Sabha.
The inflation target is a part of the Monetary Policy Framework agreement between the Finance Ministry and the Reserve Bank of India signed in January last year.
This will mean that the RBI will work to contain consumer price index-based inflation at an average 4 per cent, with an upper limit of 6 per cent and lower limit of 2 per cent.
“Fixation of an inflation target while giving due emphasis to the objective of growth and challenges of an increasingly complex economy, is an important monetary policy reform with necessary statutory back-up,” said a Finance Ministry statement.
Under the agreement, the six-member committee will set interest rates to lower consumer price inflation to 4 per cent from 2016-17. Each member of the committee will have one vote and the Reserve Bank of India Governor will have a second or casting vote, in case of a tie.
In June, the government had also notified the amended RBI Act and the rules for the procedure for selection of members of the MPC and terms and conditions of their appointment and factors constituting failure to meet inflation target under the MPC Framework.
The MPC members are likely to be selected by the end of the month.
Credits The Hindu Business Line