New monetary policy framework by Dec

Govt to fix inflation target, RBI panel will decide how to meet it; mix of Patel and FSLRC suggestions

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A new monetary policy framework is to be put in place by December, with the government setting the inflation target, to be implemented by a policy panel.

The finance ministry and the Reserve Bank of India (RBI) are soon expected to sign a formal agreement under which the central bank will pursue the retail inflation target decided by the government.

“Since it is a Budget announcement, it has to be put in place by December. It will be a part of the Action Taken Report to be tabled in Parliament by January 15,” said a ministry official who did not wish to be identified.

Finance Minister Arun Jaitley, in his Budget speech in July, had said it was essential to have a modern monetary policy framework to meet the challenge of an increasingly complex economy. And, the government, in close consultation with RBI, would put in place such a framework.

“The finance secretary and the (RBI) governor had discussions on it. We have completed our internal work. It will be put up before the finance minister when he joins office (he's currently recovering from a surgical procedure),” the official added.

Under this framework, the interest rate will be decided by a monetary policy committee, so as to ensure inflation remains within the targeted levels. The official made it clear that the government would set the inflation target and RBI could only give suggestions.

“What is the appropriate inflation target for India cannot be decided by RBI. It has to be decided by the government. It may decide it in consultation with Parliament or on its own,” said the official.

In most countries, said the official, the monetary policy framework is laid down by the legislature. In some, the decision is taken by the executive, on its own or in consultation with the legislature.

A committee headed by RBI deputy governor Urjit Patel had suggested the central bank target to bring down retail inflation to eight per cent by January 2015 and six per cent by January 2016. The Financial Sector Legislative Reforms Commission had said the government should determine the objective of monetary policy. The official said the new framework could be a combination of both sets of recommendations.

RBI Governor Raghuram Rajan has been keeping policy rates high to keep inflation under check and might not ease the policy till the inflation targets are largely met. Retail inflation slowed to 7.8 per cent in August but the central bank is more worried about its target of six per cent by early 2016.