February 27, 2021 5:34:40 am
The Reserve Bank of India (RBI) has proposed to retain the current numerical framework for the target and tolerance band for inflation — target of 4 per cent with a plus or minus two per cent tolerance band — for the next five years in the wake of the repetitive incidence of supply shocks, still elevated inflation expectations and projection errors.
It has also recommended refinements in the Monetary Policy Committee (MPC) framework to make it more relevant and operationally efficient. “The current tolerance band of plus or minus two per cent may be retained notwithstanding the central tendency emerging from the country experience of lowering targets and narrowing bands over time,” the RBI said in its Report on Currency and Finance. This means inflation can go up to 6 per cent and come down to two per cent.
Finance Minister Nirmala Sitharaman had recently said the government would review the inflation target band as the five-year term for the MPC nears an end. The six-member MPC, headed by the RBI Governor, decides on the monetary policy keeping in mind this inflation target band.
Retail inflation had fallen to a 16-month low of 4.06 per cent in January due to easing of food and vegetable prices.
The RBI has proposed to limit the shut period for the MPC to start seven days before policy announcement and end three days after the day policy is announced, staggering onboarding of external members on the Committee, an official communication policy document for the MP, releasing the minutes within a week of the policy announcement and releasing the policy at a prefixed and pre-announced time.
It has also proposed to maintain the transcripts of the MPC meetings and its release with a lag of 5-7 years at a future date and provide a more explicit forward guidance on the interest rate path at a future date, as the projection process is strengthened further over time. The RBI is also for modifying the definition of failure from the current three consecutive quarters norm of inflation remaining outside the tolerance band to four consecutive quarters.
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