The RBI’s six-member monetary policy committee voted unanimously to raise the repo rate to 4.9% in a bid to tame inflation.
Reasons behind the increase —
- RBI governor said that 70% of the inflation was because of food prices, which have risen globally following the conflict in Ukraine.
- Also, average price at which India imports crude oil is now expected to be $105, against $100 earlier.
- Between February and April, headline inflation has increased by about 170 basis points. With no resolution of the war in sight, there is an upside risks to inflation due to effects of supply side shocks on the economy.
- Retail inflation soared to a near 8-year high of 7.8% in April while wholesale inflation surged to a record high of 15.1%.
What is ‘inflation targeting’?
Inflation targeting is a central banking policy that revolves around adjusting monetary policy to achieve a specified annual rate of inflation. The principle of inflation targeting is based on the belief that long-term economic growth is best achieved by maintaining price stability, and price stability is achieved by controlling inflation.
Inflation Targeting –
India commenced inflation targeting ‘formally’ in February 2015 when an agreement between the GoI and the RBI was signed related to it — the Agreement on Monetary Policy Framework. According to the agreement –
- The RBI will aim to bring Consumer Price Index – Combined (CPI-C) 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.
- RBI to publish the Operating Target(s)and establish an Operating Procedure of monetary policy to achieve the target.
- Every six months, the RBI to publish a document explaining:
- Source of inflation;
- Forecasts of inflation for the period between six to eighteen months from the date of the publication of the document; and
- 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 year 2015–16 and all subsequent years.
- Less than 2 per cent for three consecutive quarters in 2016–17 and all subsequent years.
- If the RBI fails to meet the target it shall set out in a report to the GoI –
- the reasons for its failure to achieve the target under set in this agreement;
- Remedial actions proposed to be taken by the RBI; and
- an estimate of the time-period within which the target would be achieved pursuant to timely implementation of proposed remedial actions.
- Any dispute regarding the interpretation or implementation of the agreement to be resolved between the Governor of RBI and the GoI.
About the Monetary Policy Committee –
- Monetary policy refers to the policy of the central bank with regard to the use of monetary instruments under its control to achieve the goals specified in the RBI Act.
- The primary objective of the RBI’s monetary policy is to maintain price stability while keeping in mind the objective of growth.
- In May 2016, the RBI Act was amended to provide a legislative mandate to the central bank to operate the country’s monetary policy framework.
- This amendment lays down that —
- the Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation target”, and
- that the decision of the Monetary Policy Committee shall be binding on the Bank.
- The Committee —
- Under Section 45ZB of the amended RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee (MPC).
- MPC will determine the policy interest rate required to achieve the inflation target. The first such MPC was constituted on September 29, 2016.
- Members of MPC — As per the amended RBI act, the MPC shall consist of
- the RBI Governor as its ex officio chairperson,
- the Deputy Governor in charge of monetary policy,
- an officer of the Bank to be nominated by the Central Board, and
- three persons to be appointed by the central government.
- The last category of appointments must be from persons of ability, integrity and standing having knowledge and experience in the field of economics or banking or finance or monetary policy.