Inflation target ball back in govt's court

Contrary to expectations, changes to RBI Act fix no target

The gazetted amendments to the Reserve Bank of India Act, passed by Parliament last month, show that the amended law itself has not fixed any specific inflation target, contrary to what was expected earlier and mentioned in the Urjit Patel committee’s report on the new monetary policy framework.

Also, the task of fixing the inflation target has been left to the Union government, which will determine it, in consultation with the Reserve Bank of India (RBI). The specific inflation target, linked to the consumer price index (CPI), will be notified separately through the official gazette and this target would remain valid for five years.
 

The Urjit Patel committee had suggested that the inflation target, linked to CPI, should be four per cent with a permissible range of two per cent above or lower than the target. The target should be set in the frame of a two-year horizon, the committee recommended.

Earlier expectations were that the target of four per cent with a range of plus-minus two per cent would be part of the amendments to give it legal sanctity that will not be easy to dilute.

It is likely the new notification would also specify a CPI-linked inflation target of four per cent with a range of two per cent either side, but this target will remain valid only for five years and a new one has to be fixed after that, giving rise to some uncertainty.

The gazetted amendments also show that the RBI governor as the chairman of the Monetary Policy Committee would have a second vote, which he can use as a casting vote in case of a tie among members.

Also, the proceedings of the committee’s meetings will remain confidential, but the RBI will publish after the conclusion of every meeting of the committee the resolution adopted by it. The decision of the committee on monetary policy issues will be binding on the RBI.

The Monetary Policy Committee will have six members including the RBI governor, who will be the chairman. Also, the deputy governor of RBI in charge of the monetary policy and an RBI officer nominated by the central board of the RBI.

The three remaining members of the committee would be experts selected by a six-member search-cum-selection committee headed by the Cabinet secretary.

The search-cum-selection committee will also have the RBI governor as a member or his nominee, who should not be below the rank of the deputy governor. Others on this committee would be the economic affairs secretary and three experts in the field of economics, banking or finance, to be nominated by the Union government.    

The Urjit Patel Committee had recommended a five-member monetary policy committee, with the RBI governor as the chairman, the deputy governor of the RBI in charge of monetary policy as the vice-chairman, the executive director in charge of monetary policy and two external members to be selected by the chairman and the vice-chairman of the committee. In case of a tie, arising out of the absence of some members, the RBI governor would have a casting vote, according to the Urjit Patel committee’s recommendations.

The gazetted amendments to the RBI Act also specify clearly that the primary goal of the monetary policy is to maintain price stability while keeping in mind the objective of growth.

The new law states that the monetary policy framework will be operated by the RBI. The determination of the inflation target and the creation of the monetary policy committee are instruments of operationalising the monetary policy framework.

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DIFFERENT STROKES
What the amended RBI Act says

• Govt to fix CPI-linked inflation target in consultation with RBI, once in five years. Inflation target to be notified separately through the gazette
• Monetary Policy Committee, chaired by RBI Governor, will have six members — three from RBI, including the chairman, and three outside experts to be selected by a committee headed by Cabinet secretary
• RBI governor to have a second vote or a casting vote in case of a tie

What the Urjit Patel committee says

• RBI to adopt CPI as the nominal anchor or inflation target and set it at 4 per cent with a band of plus-minus 2 per cent. Target to be set in the frame of a two-year horizon
  

 

Monetary Policy Committee, chaired by RBI governor, will have five members — three from RBI, including the chairman, and two external experts to be selected by the RBI governor
 

RBI governor to have a casting vote in case of a tie

Note: CPI stands for Consumer Price Index