A slightly relaxed stance on inflation targeting is likely to be kept under the monetary policy framework agreement signed between the finance ministry and the Reserve Bank of India earlier this year.
“The RBI will be expected to keep inflation rates under control as prescribed, but the view is that there has to be some leeway. The monetary policy framework agreement that has been signed has also provided some flexibility in inflation targeting,” said a person familiar with the issue, adding that the central bank has already been given a two per cent bandwidth for the inflation target from next fiscal.
The finance ministry and the RBI had in February this year signed the monetary policy framework agreement, under which the central bank is expected to bring down inflation to six per cent by April 2016 and thereafter keep it at 4 per cent from 2016-17 with a band of (+/-) 2 per cent.
Under the agreement, the RBI will be seen to have failed the inflation target if it is at more than 6 per cent for three straight quarters from 2015-16 onwards or less than 2 per cent for three straight quarters from 2016-17 onwards.
In such a case, the RBI will be expected to submit a report to the government on reasons for failing to meet the target.
While the targets set under the monetary policy framework agreement are considered sacrosanct, the source said more leeway could be given in case of an extraordinary event or crisis. “As of now, there is no concern. The government is also keen to continue with fiscal consolidation that would keep away inflationary pressures while low oil and commodity prices in the global market are expected to keep inflation at bay,” he said, adding that there could be more thinking on the issue at a later date.
The monetary policy framework agreement stems from the recommendations of the Urjit Patel committee report.
The government and the RBI are also now working on the contours of the monetary policy committee that would be responsible for deciding on policy rates required to keep inflation under control. The setting up of the monetary policy committee will also require amendments to the RBI Act as currently it has no provision for such an arrangement.
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