Monetary policy reform: Govt sets 4 pc inflation target for next 5 years
Moving towards a new regime, the central government today notified 4 per cent inflation target for the next five years, based on which the new interest rate setting panel would take its monetary policy decisions going forward.
The move by the Centre, which provides for a margin of plus or minus 2 per cent in this target thus fixing the upper tolerance level at 6 per cent till 2021, is being seen as an attempt by the government to put the seal on outgoing RBI Governor Raghuram Rajan's inflation-first model of monetary policy.
"In view of the powers conferred by Section 45ZA of the RBI Act, 1934, the central government, in consultation with the bank (RBI), hereby notifies the inflation target beginning from the date of publication of this notification and ending on March 31, 2021," the notification said.
The announcement is seen as an important strategy of the inflation-fight policy pioneered by the outgoing RBI Governor Raghuram Rajan.
The government and the RBI had in early 2015 entered into a monetary policy framework agreement, under which RBI would set the policy interest rates and aim to bring inflation below 6 per cent by January 2016.
Against this backdrop, the central government had also amended the RBI Act through Finance Act, 2016. However, the inflation target was not mentioned.
The government has also started the process of setting up a Monetary Policy Committee. The MPC would be mandated to set the interest rate -- a practice now being done by the RBI.
The interest rates would be based on inflation target set up by the government and also agreed upon by the RBI.
However, according to media reports, some experts including former RBI Governor D. Subbarao have disfavoured fixing inflation target given the challenge to ensure financial stability.