The Centre and the Reserve Bank of India have signed an agreement under which the central bank will prioritise controlling price rise above the other objectives of the monetary policy, interest rates and the foreign exchange rate. Finance secretary Rajiv Mehrishi signed the agreement with Reserve Bank of India (RBI) Governor Raghuram Rajan on February 20, as per which the RBI is committed to bringing inflation below 6 per cent by January 2016. The consumer inflation target has been set at 4 per cent, with a band of plus or minus 2 percentage points, for the financial year 2016-17.
Under the agreement, the central bank will be deemed to have missed its target if consumer inflation remains above the 6 per cent level for three consecutive quarters during 2015-16 or if it remains below 2 per cent for three consecutive quarters during the year 2016-17. In case of a failure,RBI will have to specify the reasons. Similar to his counterpart in England the RBI governor will have to write a letter to the government explaining why he failed and suggest remedial actions and estimate the time period within which the target will be achieved once the corrective steps are implemented.
At the insistence of the finance ministry the agreement also said the objective of the agreement 'is to primarily maintain price stability, while keeping in mind the objective of growth.” Also, the factors such as drought or floods, which have a bearing on prices, will be factored in. Further, Finance minister Arun Jaitley has said that the RBI Act will be amended later this year to set up a monetary policy committee (MPC), which will decide on rates.
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