Finance minister Arun Jaitley on Monday said the RBI Act, 1934 will be amended to give a statutory basis to the monetary policy framework.
Last year, the government and the Reserve Bank of India (RBI) agreed to adopt a monetary policy framework, which will make taming inflation the priority of the central bank’s policy decisions.
Under the new system, billed as the biggest monetary reform measure in a generation, the RBI set a new retail inflation target of below 6% by January 2016 and 4% by March 2017.
The 4% target will have a band of plus or minus 2 percentage points, according to a document published on the finance ministry’s website on Monday.
The framework will also empower the RBI governor to decide the appropriate measures needed to achieve that target.
A panel headed by RBI deputy governor Urjit Patel had proposed moving to a medium-term inflation target when setting the monetary policy.
This approach has now become standard international practice in many mature economies, such as Britain, where the central bank sets interest rates and other monetary tools according to an inflation target set by the government.
The RBI uses monetary tools to stymie demand and cool prices. In times of weak growth and low prices, it is usually expected that the central bank will cut interest rates to goad companies to invest, add capacities, hire more, and prompt people to spend on houses, cars and other goods.
The new framework will remove speculation ambiguities in the way RBI’s decisions on interest rates.
Every six months, the central bank will have to bring out a document explaining the sources of inflation and forecast for the next six to eight months. However, it will also have give out a report to the Centre in case the target is missed for a period of time.
Last year, a government-appointed panel had proposed to effectively take away the RBI governor’s overriding powers on interest rate decisions.
The move, which could have taken away the central bank’s status as an independent and autonomous monetary authority, had triggered widespread protests.
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