New Delhi: Moving towards a new regime, the government on Friday notified 4 per cent inflation target for the next
five years, based on which the new Monetary Policy Committee will fix interest rates.
There will be a margin of plus or minus 2 per cent in this target, thus fixing the upper tolerance level at 6 per cent till 2021. The move is seen by analysts as government putting the seal on outgoing RBI Governor Raghuram Rajan‘s inflation-first model of monetary policy.
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 may push up inflation further.
A Finance Ministry 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 the 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.
The 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. The Monetary Policy Committee will set interest rates by majority, with a casting vote for the central bank governor in the event of a tie.
