The government and the RBI on Monday signed an agreement on Monetary Policy whereby the government has set a target for RBI to bring down inflation below six per cent by January 2016. If the RBI fails to meet the target, it will have to report to the government the reasons for the failure to achieve the target, what remedial action it proposes to take and estimate of the time period within which the target would be achieved.
The agreement will put in place a framework of a modern monetary policy to meet the challenges of an increasingly complex economy. This framework will be monitored by the RBI, said the agreement. This is in line with the best practices followed by central banks round the world including the US Fed Reserve.
Finance minister Arun Jaitley had in his budget speech said that the government would amend the RBI Act to provide for a Monetary Policy Committee and have a memorandum of understanding with the Reserve Bank.
However there was no mention of the committee in the agreement signed on Monday. According to the agreement signed on Monday, the Reserve Bank will aim to bring inflation below six per cent by January 2016, and for the fiscal 2016-17 and all subsequent years the inflation will be four per cent with a band of plus or minus two per cent.
