The Centre and the Reserve Bank of India signed an agreement last month under which the central bank will prioritise controlling price rise above the other objectives of the monetary policy — interest rates and the foreign exchange rate.
The agreement formalised a policy the Reserve Bank had been following since January 2014, which is a significant development in monetary policy formulation championed by Governor Raghuram Rajan.
The Reserve Bank is committed to bringing inflation below 6 per cent by January 2016. The consumer inflation target has been set at 4 per cent, with a band of plus or minus 2 percentage points, for the financial year 2016-17.
Under the agreement, the central bank will be deemed to have missed its target if consumer inflation remains above the 6 per cent level for three consecutive quarters during 2015-16 or if it remains below 2 per cent for three consecutive quarters during the year 2016-17.
The bank will have to explain to the government the causes, and what steps it intends to take to steer inflation back within a given time if it misses the target.
The rate of consumer price inflation was 5.11 in January.