Union Government and RBI signed an agreement on Monetary Policy Framework

Union Government and Reserve Bank of India (RBI) signed an agreement on Monetary Policy Framework. The agreement was signed on 20 February 2015 but was made public on 2 March 2015.

The agreement empowers the RBI to go for inflation targeting that is common in developed countries and it also empowers RBI to monitor its monetary policy framework.

As per the agreement, RBI will aim to bring down the inflation below six percent by January 2016 and inflation target for 2016-2017 and subsequent years will be 4 percent +/-2 percentage points.

Features of the agreement that empowers RBI to monitor its framework

• India’s monetary policy framework will be operated by the RBI.
• India’s monetary policy framework will aim to “maintain price stability while keeping in mind the objective of growth.
• If the RBI fails to meet the target, then it will have to report to the Union Government the reasons for the failure to achieve the target.
• It will also provide the remedial action to take and estimate of the time period within which the target would be achieved.
• It will put in place a framework of a modern monetary policy to meet the challenges of an increasingly complex economy.
• The RBI’s Governor will determine the country’s key interest rates or any measures needed to achieve that inflation target.
• It binds the Union Government to take proactive measures for price control.

The agreement will provide a predictable policy stance on inflation, helping investors, especially in the debt market.

The agreement was signed in line with the recommendations of the RBI’s Urjit Patel committee. The committee’s recommendation will smoothen the monetary policy scene in the country.

At present, the Union Government and the RBI provides inflation estimates but don’t set any targets for it.