Govt to soon notify inflation target under framework agreement

The government is likely to notify this week inflation target for next five years under the monetary policy framework agreement, a top official said today.

The target will seek to maintain price stability while meeting growth objective, he said.

"We are going to notify it (inflation target) soon. It can be notified in a day or two," said the official.

The government and the Reserve Bank had in February last year entered into a Monetary Policy Framework Agreement, under which RBI would set the policy interest rates and would aim to bring inflation below 6 per cent by January 2016 and within 4 per cent with a band of (+/-) 2 per cent for 2016-17 and all subsequent years.

The government had amended the RBI Act through Finance Act 2016 to provide for a Monetary Policy Committee (MPC) with a specific inflation goal, but it did not notify 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." According to Section 45ZA of RBI Act, the government, in consultation with RBI, has to notify Consumer Price Index- based retail inflation target every five years.

A Finance Ministry notification issued last month said it would be construed as failure of monetary policy if average inflation exceeds or falls below the "tolerance level" specified in the notification for any three consecutive quarters.

The government has kicked-off the process of setting up a MPC, which will take over the job of interest rate setting from the central bank. The rates would be based on inflation target set up the government and RBI.

MPC will set interest rates by majority, with a casting vote for the central bank governor in the event of a tie.

Out of the six members of MPC, three will be from RBI -- the Governor, who will be the ex-officio Chairperson; a deputy Governor and an executive director.

The other three members will be appointed by the central government, on the recommendations of a Search-cum-Selection Committee, which will be headed by the Cabinet Secretary.