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Govt., RBI sign agreement on Monetary Policy Framework in shift to inflation targeting

The Central Government and the Reserve Bank of India (RBI) have signed a landmark agreement on Monetary Policy Framework under which the RBI will aim to bring inflation below 6 per cent by January 2016.
 
The target for financial year 2016-17 and all subsequent years shall be 4 per cent, with a band of +/- 2 per cent.
 
The agreeent, signed on February 20 and made public yesterday, is a shift towards inflation targeting that RBI Governor Raghuram Rajan has been advocating for some time.
 
Signed by Dr Rajan and Finance Secretary Rajiv Mehrishi, the agreement stressed it was essential to have a monetary police framework to meet the challenge of an increasingly complex economy.
 
"The objective of monetary policy is to primarily maintain price stability, while keeping in mind the objective of growth," it said.
 
The agreement said the monetary policy framework shall be operated by the RBI. The Governor, and in his absence the Deputy Governor in charge of monetary policy, shall determine the Policy Rate, as well as any other monetary measures, to achieve the target.
 
The Reserve Bank shall publish the operating target(s) and establish an Operating Procedure of Monetary Policy through which the Operating Target will be achieved. Any change in the operating target(s) and the operating procedure  in response to evolving macro-financial conditions shall also be published.
 
Once every six months, the Reserve Bank shall publish a document explaining the souces of inflation and forecasts of inflation for the period between six to 18 months from the date of the  publication of the document.
 
According to the agreement, the RBI shall be seen to have failed to meet the target if inflation is more than 6 per cent for three consecutive quarters for the financial 2015-16 and all subsequent years or less than 2 per cent for three consecutive quarters in 2016-17 and all subsequent years.
 
If the Reserve Bank fails to meet the target it shall set out in a report to the Central Government the reasons for its failure to achieve the target, the remedial actions proposed to be taken by it, and an estimate of the time period within which the target would be achieved pursuant to timely implementation of proposed remedial actions.
 
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