Finance Ministry likely to retain inflation target for next 5 years at 4±2 per cent, notify soon

The level is neither too low nor too high to be considered for a review, may be left unchanged.

By: ENS Economic Bureau | New Delhi | Published: July 26, 2016 1:40 am
Arun Jaitley, monetary policy committee, Finance Ministry, arun jaitley, india inflation, inflation rate, rbi, raghuram rajan, finance news, rbi rate cut, rbi rate decision, repo rate, interest rates, rbi governor, money and monetary policy, business news, india economy Union Finance Minister Arun Jaitley. (PTI File Photo)

The formation of Monetary Policy Committee is still under process, but the finance ministry is likely to notify the inflation target for next five years “shortly”, senior ministry officials said. The inflation target is likely to be retained at the level of 4±2 per cent agreed for years starting 2016-17 in the monetary policy framework agreement signed last year, officials said.

“Inflation target will be notified shortly,” a senior finance ministry official said.

Another official said the level is neither too low nor too high to be considered for a review and therefore, it’s likely to be left unchanged.

Last month, the finance ministry had provided statutory backing to the MPC by notifying amendments to the Reserve Bank of India Act, 1934, paving the way for formation of the proposed committee. The government in the Finance Act for 2016 had introduced the amendments to the RBI Act to enable setting up of monetary policy committee and fixing the inflation target. As per the amendments, “the central government shall, in consultation with the (Reserve) Bank, determine the inflation target in terms of the Consumer Price Index, once in every five years. The central government shall, upon such determination, notify the inflation target in the official gazette.”

The monetary policy framework agreement signed between the RBI and the Ministry of Finance in February 2015 had targeted Consumer Price Index (CPI) inflation below 6 per cent by January 2016. For 2016-17 and subsequent years, the RBI will target CPI inflation at 4 per cent with band of plus or minus 2 per cent, the agreement stated.

The agreement also stated that the RBI shall be seen to have failed to meet the target if inflation is “more than 6 per cent for three consecutive quarters for the financial year 2015-16 and all subsequent years” or “less than 2 per cent for three consecutive quarters in 2016-17 and all subsequent years.”

Last month’s finance ministry notification said the government will consider failure to achieve inflation target when “the average inflation is more than the upper tolerance level of the target notified under section 45ZA of the said Act for any three consecutive quarters; or the average inflation is less than the lower tolerance level of the inflation target notified under section 45ZA of the said Act for any three consecutive quarters.”

The government is in the process of selecting members of the MPC. The committee will comprise of six members, three of whom will be nominated by the central government, while the other three will be the RBI governor, the deputy governor in-charge of monetary policy, and one officer of the central bank nominated by its central board. The RBI governor will chair the committee with each member having one vote along with a casting vote of the governor. The three government-nominated members will be appointed by the Centre through a search-cum-selection panel, headed by the Cabinet Secretary.

The members to be appointed will be experts in the field of economics or banking or finance or monetary policy and will be appointed for a period of 4 years and shall not be eligible for re-appointment. Currently, the Governor has overriding powers to accept or reject the recommendations of the RBI panel on monetary policy.

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