RBI, govt in pact to bring inflation below 6% by January 2016

The Reserve Bank of India (RBI) and the finance ministry have agreed to a target of limiting inflation within a 6 to 2 per cent band from 2016-17 onwards, as part of a new Monetary Policy Framework Agreement signed last month and made public today.

As per the agreement, signed on 20 February 2015 with the finance ministry, RBI will aim to bring inflation below 6 per cent by January 2016 and try to limit inflation levels below 4 per cent during subsequent years within a band of +/- 2 per cent.

''The Reserve Bank will aim to bring inflation below 6 per cent by January 2016. The target for financial year 2016-17 and all subsequent years will be 4 per cent with a band of +/- 2 per cent,'' the agreement said.

RBI will publish the documents explaining the source of inflation, forecasts of inflation for a six-to eight month period from today.

The RBI would be seen as to have failed to meet inflation targets if inflation is more than 6 per cent for three consecutive quarters of the financial year 2015-16 and all subsequent years and is less than 2 per cent for three consecutive quarters of the following year 2016-17.

If the RBI fails to meet the targets, it would report to the central government reasons for its failure, detail remedial measures to be taken by the central bank and give an estimate of the time period within which the targets would be achieved.

Any dispute on its implementation will be resolved through meeting between RBI governor and the central government. 

The inflation means the Consumer Price Index (CPI) or retail inflation, as per the agreement.

It also clarified that the governor and in his absence the deputy governor (in charge of monetary policy) will determine the policy rate, as well as any other monetary measures, to achieve the target.

RBI also agreed to publish the operating targets for monetary policy and the operating procedures for achieving the targets as also RBI's response to macro-financial conditions.

In effect, RBI would keep everyone informed of its plans and procedures, which could nullify the effects of a policy action.

The new agreement is in line with finance minister Arun Jaitley's budget announcement last year when he had said, ''It is also essential to have a modern monetary policy framework to meet the challenge of an increasingly complex economy. Government will, in close consultation with the RBI, put in place such a framework.''