The government on Friday notified 4 percent inflation target with a range of plus/minus 2 percent for the next five years under the monetary policy framework agreement with the Reserve Bank.
"In view of the powers conferred by Section 45ZA of the RBI Act 1934, the central government, in consultation with the bank, hereby notifies the inflation target beginning from the date of publication of this notification and ending on the March 31, 2021," said the Government notification tabled in the Lok Sabha.
The notification fixes inflation target at 4 per cent with upper tolerance level of 6 per cent and lower limit of 2 per cent.
The government and the Reserve Bank had in February last year entered into a monetary policy framework agreement, under which RBI would set the policy interest rates and aim to bring inflation below 6 per cent by January 2016 and within 4 per cent with a band of (+/-) 2 per cent for 2016-17 and all subsequent years.
The government had amended the RBI Act through Finance Act 2016 to provide for a Monetary Policy Committee (MPC) with a specific inflation goal, but it did not notify the inflation target.
As per the amendments, "The central government shall, in consultation with the (Reserve) Bank, determine the inflation target in terms of the Consumer Price Index, once in every five years. The central government shall, upon such determination, notify the inflation target in the official gazette."
According to Section 45ZA of RBI Act, the government, in consultation with RBI, has to notify Consumer Price Index- based retail inflation target every five years.
The government has kicked off the process of setting up an MPC, which will take over the job of interest rate setting from the central bank. The rates would be based on inflation target set up by the government and RBI.
MPC will set interest rates by majority, with a casting vote for the central bank governor in the event of a tie.
Meanwhile economists have welcomed the decision of the government to retain the inflation target.
"The decision to retain the inflation target would impart continuity to policy setting amidst the impending shift towards a MPC-determined policy rate," Aditi Nayar, Senior economist at Icra has been quoted as saying in a report in The Economic Times.