MPC notified, inflation target not yet set

In two notifications issued late on Monday, the government stated the factors which constitute failure to meet inflation targets and brought into force the first part of Chapter XII of the Finance Act, 2016, which defines the new Monetary Policy Committee (MPC).

However, the inflation targets themselves, to be notified under the new Section 45ZA of the Reserve Bank of India Act, will be decided later, it is learnt.

NEW TARGETS

• The targets will be notified separately by the government in consultation with RBI
• The monetary policy framework agreement, signed in February 2015, states Consumer Price Index-based inflation at six per cent or above will be the upper tolerance limit and two per cent or below the lower one

“The targets will be notified separately by the government in consultation with RBI. It calls for in-depth discussions between the finance ministry and RBI,” said a senior official.

On Monday, the Centre notified that if average inflation was more than the upper tolerance level of the target or less than the lower tolerance level of the target notified  for any three consecutive quarters, it will be considered an MPC failure. The notification itself did not provide any range.

The monetary policy framework agreement, signed between RBI and the ministry in February 2015, states Consumer Price Index-based inflation (CPI) at six per cent or above will be the upper tolerance limit and two per cent or below the lower one. The target to be finally notified under Section 45ZA of the RBI Act will supersede the framework agreement.

The MPC will also decide on benchmark interest rates, hitherto a decision of the RBI governor.

After long disagreements on the MPC composition between ministry and RBI, it was agreed that it would have six members. The governor will head it. Three members — the governor, a deputy governor and an executive director —will be from RBI. The other three will be nominated by the government after recommendations of a search-cum-selection committee, headed by the Cabinet secretary. It will also comprise the economic affairs secretary and the RBI governor.

Each MPC member will have one vote, with the governor having an additional vote in case of a tie. “Three members of the MPC will be experts in the field of economics or banking or finance or monetary policy, be appointed for a period of four years and not be eligible for re-appointment. The meetings shall be held at least four times a year and it shall publicise its decisions after each such meeting,” the ministry stated on Monday.

Additionally, and as reported earlier, RBI will publish a monetary policy report every six months, with forecasts of inflation for between six and 18 months.

If RBI fails to meet the target, it will provide reasons, remedial actions and the estimated time within which the target will be achieved.