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India Overhauls Monetary Policy with Inflation Target

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India Overhauls Monetary Policy with Inflation Target

The Reserve Bank and the finance ministry have agreed, in the biggest change to monetary policy since opening up India's economy more than two decades ago, to introduce inflation targeting to rein in a long history of volatile price rises.

In a document dated February 20 but published on the ministry website on Monday, the two sides set a consumer inflation target of 4 percent, with a band of plus or minus 2 percentage points, by the financial year ending in March 2017.

The Reserve Bank of India (RBI) will first aim to have consumer inflation fall below 6 per cent by January 2016.

The changes bring closer to reality a goal pursued relentlessly by RBI Governor Raghuram Rajan, who has said the inflation targeting, more commonly seen in developed economies, was also vital in India.

The central bank will be deemed to have missed its target if consumer inflation is at more than 6 per cent or at less than 2 per cent for three consecutive quarters starting in the 2015/16 fiscal year, the document also showed.

The RBI's Governor will determine the country's key interest rates or any measures needed to achieve that inflation target. There was no mention in the document of a long-expected Monetary Policy Committee, though that is expected to be introduced at a later date.

Finance Minister Arun Jaitley had said on Saturday the government and the RBI had agreed on a new monetary policy framework and promised to change the RBI Act, which is required to implement the changes.

Consumer prices rose an annual 5.11 per cent compared with a 4.28 per cent gain in December, according to data issued on February that changed the base year for measuring inflation to 2012 from 2010.

© Thomson Reuters 2015

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