What is it?
- The RBI’s explicit mandate is to conduct monetary policy. 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.
- In 2016, the Reserve Bank of India Act, 1934, was amended to provide a statutory basis for the implementation of a flexible inflation-targeting framework, where the Centre and the RBI would review and agree upon a specific inflation target every five years.
- Under this, 4% was set as the Consumer Price Index (CPI) inflation target for the period from August 5, 2016, to March 31, 2021, with the upper tolerance limit of 6% and the lower tolerance limit of 2%.
- In a bid to keep inflation under specified level, the government in 2016 had decided to set up the Monetary Policy Committee headed by the RBI Governor entrusted with the task of fixing the benchmark policy rate (repo rate).
- The six-member panel, which had its first meeting in October 2016, was given the mandate to maintain annual inflation at 4 per cent until March 31, 2021, with an upper tolerance of 6 per cent and lower tolerance of 2 per cent.
Why in News?
- A RBI working paper has recommended that maintaining 4 per cent inflation is appropriate for India as targeting a lower rate could impart deflationary bias to the monetary policy.
- The paper, authored by RBI Deputy Governor Michael Debabrata Patra and another official Harendra Kumar Behera, has found a steady decline in trend inflation to 4.1-4.3 per cent since 2014.
- The inflation target has to be reviewed by end-March 2021.