India announces inflation rate targeting

Flower sellers at Pookadai in the southern Indian city of Chennai [Image: People’s Archive of Rural India]

Introducing an overhaul of its monetary policy, the Indian Finance Ministry and the Central Bank of India have agreed to inflation rate targeting, a common practice in the developed economies.

The Central Bank will aim to lower inflation to 6 per cent by January 2016 and further to around 4 per cent by March next year.

The monetary policy framework agreement, signed on February 20, was published on the Ministry website on Monday.

The framework agreement is to “primarily maintain price stability while keeping in mind the objective of growth”.

“The Reserve Bank will aim to bring inflation below 6% by January 2016. The target of financial year 2016-17 and all subsequent years shall be four per cent with a band of (+/-) 2%,” the agreement said.

While the agreement gives a free hand to the Reserve Bank of India (RBI) Governor to decide on the monetary policy measures to achieve the inflation target, if the central bank misses the inflation target, it will send a report to the government citing reasons and remedial actions.

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 6-8 months.

India central bank shall be seen to have failed to meet its target if inflation is more than 6 percent for three straight quarters in 2015/16 and subsequent years.

Retail inflation in January stood at 5.11 per cent.

The Narendra Modi-administration is struggling to follow through with a pledge to take tough steps to revive Asia’s third-biggest economy.

The Indian Finance Ministry forecast growth of 8.1 per cent to 8.5 percent growth for the fiscal year starting April 1 after the Statistics Ministry revised the way it calculates gross domestic product in January.

Indian Finance Minister Arun Jaitley on Saturday presented the 2015-16 general budget in the Indian parliament, warning that the Ministry has to keep fiscal discipline in mind despite need for higher investment.

 

TBP and Agencies