Government today notified 4 percent inflation target with a range of plus or minus 2 percent for the next five years under the monetary policy framework agreement with the Reserve Bank.
A notification tabled in the Lok Sabha fixed inflation target at 4 percent with upper tolerance level of 6 percent, while the lower limit could be fixed at 2 percent.
“In view of the powers conferred by Section 45ZA of the RBI Act, 1934, the central government, in consultation with the bank (RBI), hereby notifies the inflation target beginning from the date of publication of this notification and ending on March 31, 2021,” the notification said.
The announcement is seen as an important strategy of the inflation-fight policy pioneered by the outgoing RBI Governor Raghuram Rajan.
The government and the RBI had in early 2015 entered into a monetary policy framework agreement, under which RBI would set the policy interest rates and aim to bring inflation below 6 per cent by January 2016.
Against this backdrop, the central government had also amended the RBI Act through Finance Act, 2016. However, the inflation target was not mentioned.
MPC will set interest rates by majority, with a casting vote for the central bank governor in the event of a tie.
The government has kicked off the process of setting up an MPC, which will take over the job of interest rate setting from the central bank. The rates would be based on inflation target set up by the government and RBI.