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Monetary policy overhaul sets inflation road map for RBI, govt

The proposed Indian Financial Code by the FSLRC had suggested reviewing the roles of the various financial sector regulators.

By: ENS Economic Bureau | New Delhi |
March 3, 2015 2:44:58 am

The finance ministry and the Reserve Bank of India have reached an agreement on inflation targeting under which the central bank will aim to lower retail inflation to 6 per cent by January 2016, and to 4 per cent from 2016-17.

The consensus is part of the monetary policy framework agreement signed between the RBI and the finance ministry on January 20.

“The target of financial year 2016-17 and all subsequent years shall be 4 per cent with a band of (+/-) 2 per cent,” the agreement said.

“The objective of the monetary policy framework agreement is clearly to contain inflation,” finance secretary Rajiv Mehrishi said on Monday, adding that the finance ministry would soon start discussions with stakeholders on setting up the monetary policy committee. The government would also table the related amendments for the RBI Act in the next fiscal, he said.

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The pact gives a free hand to the RBI Governor to decide on the monetary policy measures that are required to meet the inflation target, but also requires the RBI to give a report to the Central government in case the target is missed for a period of time.

“The Governor, and in his absence the Deputy Governor in charge of monetary policy shall determine the policy rate, as well as any other monetary measures under the target,” said the agreement. The RBI is also required to make public every six months a document explaining the sources of inflation and the inflation forecast for the period between six to eight months.

The decision to develop a monetary policy framework agreement is based on the recommendations of the Urjit Patel committee and the Financial Sector Legislative Reforms Commission.

Meanwhile, even as the Budget has announced moving ahead with some of the recommendations of the FSLRC, the finance secretary asserted that monetary policy would continue to be the core responsibility of the RBI and the government would not interfere with that.

The proposed Indian Financial Code by the FSLRC had suggested reviewing the roles of the various financial sector regulators.

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