Union Finance Minister to set inflation targets for RBI

Union Finance Minister on 12 October 2014 gave the green signal for the much awaited reforms in the monetary policy framework.

As per the new reforms, Union Government will specify the inflation targets for the Reserve Bank of India (RBI) to achieve. The RBI will set inflation as its top priority in its policy statements.

The decision is in contrary to the recommendation of an Urjit Patel Committee. Urjit patel committee was formed by RBI in 2013 to examine monetary policy.

The committee had recommended that the monetary policy decision-making should be vested with a monetary policy committee, chaired by the RBI Governor.

Present Status
Until now, the RBI has the sole power to regulate the monetary policy. RBI governor regulate the monetary policy with the help of deputy Governors of RBI.

Other recommendations of Urjit Patel Committee

Other recommendations were that the central Bank adopts 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.

Inflation target

Inflation targeting is an economic policy in which a central bank estimates and makes public a projected, or target inflation rate and then attempts to steer actual inflation towards the target through the use of interest rate changes and other monetary tools.

Because interest rates and the inflation rate tend to be directly related, the likely moves of the central bank to raise or lower interest rates become more transparent under the policy of inflation targeting.

World Approach

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.

In several countries, a similar structure is already in place, where a monetary policy panel fixes rates. The move to change the structure comes amid debate over RBI's powers in the future and the primacy it enjoys among financial sector regulators.