The center has decided to hold on to the ‘inflation targeting’ with at 4% with a tolerance band of +/- 2 percentage points for the Monetary Policy Committee of the Reserve Bank of India for the coming five years. The inflation target for the period April 1, 2021, to March 31, 2026, under the Reserve Bank of India Act, 1924, has been kept at the same level as it was for the previous five years. Economists welcomed the continuity in the framework, despite the recent spate of high inflation prints beyond the 6% upper threshold of the inflation target.
Inflation targeting refers to keeping the inflation rate within the permissible band to ensure the certainty for carrying out investment activities. It refers to a method of manipulating a nation's interest rates, exchange rates, and financial regulations in order to achieve a particular inflation goal.
The main objective of the inflation targeting is to bring down the inflation rate over time. It is a form of monetary policy in which the central banks try to keep an eye on the prices in order to control the amount of increase.
The agreement between the Reserve Bank of India (RBI) and the central government signed in February 2015. The agreement explicitly made inflation targeting the objective of the MPC while using the repo rate as the instrument for it.
The Reserve Bank’s MPC was given the target of keeping inflation at 4% with a tolerance limit of 2%. This meant that inflation should be between 2% and 6%.
The Monetary Policy Committee (MPC) is a committee of the Central Bank of India. The RBI Governor heads it. It was set up by the Government of India in September 2016. The committee decides the interest rates which affect the economy, based on macroeconomic factors like inflation and growth.
The Reserve Bank of India (RBI) has released a notification amending the Reserve Bank of India Act, 1934. This amendment is to enable the Monetary Policy Committee (MPC) to function as an independent body. The RBI Act, 1934 was amended by the Finance Act, 2016.
It also lays down the framework for institutional arrangements in arriving at appropriate monetary policy decisions. The primary objective of the Monetary Policy is to achieve price stability while keeping in mind the objective of growth. As a central bank, RBI is committed to meet these objectives with a focus on maintaining stability in the value of money and its purchasing power.