NEW DELHI: Moving towards a new regime, the government today notified 4 per cent inflation target for the next five years, based on which the new interest rate setting panel would take its monetary policy decisions going forward.
The move, which provides for a margin of plus or minus 2 per cent in this target thus fixing the upper tolerance level at 6 per cent till 2021, is being seen as government putting the seal on outgoing RBI Governor Raghuram Rajan’s inflation- first model of monetary policy.
“Fixation of an inflation target while giving due emphasis to the objective of growth and challenges of an increasingly complex economy, is an important monetary policy reform with necessary statutory back-up,” a Finance Ministry statement said.
In accordance with a monetary policy framework agreement it had entered into with the Reserve Bank in February last year, government notified consumer price inflation target of 4 per cent for the next five years, with an upper tolerance level of 6 per cent and lower tolerance limit of 2 per cent.
“In view of the powers conferred by Section 45ZA of the RBI Act 1934, the central government, in consultation with the Bank, hereby notifies the inflation target beginning from the date of publication of this notification and ending on the March 31, 2021,” said the government notification tabled in the Lok Sabha.
Consumer price index or CPI rose by 5.77 per cent in June, the fastest pace in 22 months and it is expected that the implementation of the new Goods and Services Tax (GST) may push up inflation further.
The statement said if the average inflation is more than the upper tolerance level of 6 per cent, or less than the lower tolerance level of 2 per cent, for any three consecutive quarters, it would mean a failure to achieve the inflation target.
“Where RBI fails to meet the inflation target, in terms of the provisions of RBI Act, it shall set out a report to the central government stating the reasons for failure to achieve the inflation target; remedial actions proposed to be taken by RBI; and an estimate of the time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions,” it added.
Government is in the process of setting up a six-member new interest rate-setting panel that will implement the inflation target. The upcoming policy of the RBI on August 9 will be the last monetary review by Rajan.
Rajan will step down on September 4 after completing a three-year term. (AGENCIES)
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