Post Monetary Policy Committee formation, FinMin plans to set inflation goals for next five years

Under the current system, the Governor has overriding powers to accept or reject the recommendations of the RBI panel on monetary policy.

Written by Aanchal Magazine | Alka Pande & Ravish Tiwarilucknow/new Delhi | Published:July 5, 2016 2:51 am
RBI, monetary policy, rbi, finance ministry, business, economy, shaktikanta das, banking news, business news, news, india news The monetary policy framework agreement had targeted CPI inflation below 6 per cent by January 2016.

As part of its ongoing process to move towards a new regime of inflation targeting under the proposed six-member Monetary Policy Committee (MPC), the finance ministry plans to notify the inflation target for next five years after the formation of the committee. The notified inflation target will supersede the inflation target set in the monetary policy framework agreement signed on February 20 last year, though officials say it is likely to be retained at the same level as specified in last year’s agreement.

“It was stated earlier that the government will decide the inflation target in consultation with the RBI. So, due process will be followed. First, the search-cum-selection committee had to be formed and then the Monetary Policy Committee will be formed. The statutory backing has been given for the committees and now only the inflation target is left. The inflation target will be notified only after the MPC is constituted,” a senior government official said.

The target for next five years is unlikely to be changed from the 4±2 per cent agreed for years starting 2016-17 in the monetary policy framework agreement, the official added.

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Last week, 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 week’s finance ministry notification says 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, with the selection of the government’s nominees for the committee being in advanced stages.

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 RBI governor. The three government-nominated members will be appointed by the central government through a search-cum-selection committee, headed by the Cabinet Secretary.

The members to be appointed by the government 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. Under the current system, the Governor has overriding powers to accept or reject the recommendations of the RBI panel on monetary policy. The August 9 monetary policy review will be the last review under the Governorship of Raghuram Rajan, whose three-year term ends on September 4. Rajan has announced plans to join academia at the end of his term as the RBI Governor.

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