RBI for retaining inflation target band

RBI for retaining inflation target band

Context: According to the Reserve Bank of India’s Report on Currency and Finance (RCF) for 2020-21 maintaining the inflation target at 4 per cent into the medium-term is appropriate. Threshold Inflation above which growth is unambiguously impaired ranges 5-6 per cent in India, indicating that an inflation rate of 6 per cent is the appropriate upper tolerance limit for the inflation target

Monetary Policy

• Monetary policy is the macroeconomic policy laid down by the Reserve Bank of India.
• It involves the management of money supply and interest rates. The central bank tweaks interest rates to achieve macroeconomic objectives such as liquidity, consumption and inflation.
• Legal framework: The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy, explicitly mandated under the Reserve Bank of India Act, 1934.

Inflation Targeting by RBI:

• The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth.
• Under Section 45ZA of the RBI Act1934, the Centre, in consultation with the central bank, fixed the inflation target/Flexible Inflation Target(FIT) for the period between August 5, 2016 and March 31,2021, at 4 per cent, with upper tolerance level of 6 percent and lower tolerance level of 2per cent.
• In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.
• The amended RBI Act also provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once in every five years.
• Accordingly, the Central Government has notified 4 percent (+/- 2%) Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021.