The Reserve Bank of India (RBI) and Finance Ministry are set to finalise a new monetary policy framework by the end of the year under which the central bank will pursue the retail inflation target to be decided by the government. It is reported that the internal work for the new monetary policy framework is in advanced stages and the government will have to take a final decision on it in consultation with the central bank.
Under the new framework, a separate monetary policy committee will be set up which will set the interest rate with a view to ensure that inflation remains within the targeted levels. The move to set a new monetary policy framework came in after the recommendation of Urjit Patel Committee which had suggested that the RBI should target to bring down retail inflation to 8 percent by January 2015 and 6 percent by January 2016. Earlier, the government had also expressed the need to have a modern monetary policy framework to meet the challenge of an increasingly complex economy.
Considering price stability an essential condition for economic revival, the RBI has been pursuing hawkish monetary policy stance to keep inflation under check. The central bank has not reduced rates in four consecutive policies in spite of pressure from the government and industry to cut policy rate to boost economic growth.