Centre to set inflation targets for RBI

Jaitley nod for policy revamp varies from Urjit Patel panel suggestion

October 13, 2014 03:13 am | Updated December 04, 2021 11:29 pm IST - Washington

Under a proposed new regime, the RBI will set inflation as its top priority in its policy statements. File photo

Under a proposed new regime, the RBI will set inflation as its top priority in its policy statements. File photo

Finance Minister Arun Jaitley has given the go-ahead for a major overhaul of the current monetary policy framework wherein the Centre will specify ‘inflation targets’ for the Reserve Bank of India (RBI) to achieve.

Under the proposed new regime, the RBI will set inflation as its top priority in its policy statements.

The decision departs from the recommendation of an expert committee of the RBI, appointed to examine monetary policy. Headed by Reserve Bank Deputy Governor Urjit R. Patel, the committee had recommended that the monetary policy decision-making should be vested with a monetary policy committee, chaired by the RBI Governor.

Other recommendations were that the apex bank adopt the new Consumer Price Index (CPI) as the measure of the nominal anchor for monetary policy. And that the RBI set the target CPI inflation level at 4 per cent (+/- 2 per cent) to be achieved through its monetary policy tools.

A senior Ministry official told The Hindu that the Modi government decided that the RBI “cannot set for itself an inflation target level of 4 per cent for all times to come…the Centre will set this target.”

Another Ministry source said: “It is best that inflation targets are set by the governments elected by the people and not a bunch of bureaucrats and economists sitting in the Reserve Bank.”

RBI Governor Raghuram Rajan said here last week that many earlier reports including one by himself talked about the importance of central bank accountability and independence.

“It is important to ensure that the framework allows the central bank to have clear objectives and clear tools and the ability to achieve the goals,” Dr. Rajan had said in an interview.

In his 2014-15 budget speech Mr. Jaitley said the Modi government was keen on moving to a modern monetary policy framework to meet the challenges of an increasingly complex economy.

The Ministry official said the world was rethinking if inflation targeting should be the gold standard for monetary policy makers. The European Central Bank, for instance, follows ‘eclectic’ monetary policy approach where growth and other macroeconomic goals are also objectives.

CPI inflation grew at the rate of 7.8 per cent in August. In its monetary policy review held on September 30, the RBI said it expected it to drop to 6 per cent by January 2015 for which it was holding interest rates steady despite weakening industrial output growth.

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