Reserve Bank of India (RBI) governance

Context– RBI has to answer to Parliament why it misses the inflation target and what plans do they have to control inflation.

What is Inflation targeting and what happen when RBI fails to meet inflation target?

  1. Inflation targeting involves using monetary policy to keep inflation close to the agreed target. RBI and Government of India signed a Monetary Policy Framework Agreement in February 2015.
    • As per terms of the agreement, the objective of monetary policy framework would be primarily to maintain price stability (inflation targeting), while keeping in mind the objective of growth.
    • Target given to MPC:The Reserve Bank of India’s (RBI) MPC was given the target of keeping inflation at 4% +/- 2%. This meant that inflation should be between 2% and 6%.
  1. Condition for failure of inflation target – A breach of the tolerance level for three consecutive quarters will constitute a failure of monetary policy.
    • In such case– RBI have to send a report to the central government stating reasons and the remedial actions it proposes to initiate, and an estimate of the time-period within which it expects to achieve the inflation target through the corrective steps proposed.
    • Aim– To enhance transparency and accountability of the central bank.

What was the reason proposed by RBI for the breach of inflation target?

    • Lack of Data due to lockdown– The MPC is of the view that there was a break in the consumer price index (CPI) series since inflation data for April and May was imputed and not collected by visiting the markets by NSO surveyors. It was rather estimated by the NSO.

However, Prices could be collected from the urban markets and villages after lockdown restriction were lifted and non-essential activities partially restored.

Way forward-

  • The central bank needs to answer three questions — why it has failed to achieve its target; what remedial measures it would take to bring inflation back within the target range; and by what time.
  • Transparency can enable more informed decision-making within the government, greater public scrutiny of the RBI’s performance, and an improved inflation-targeting regime.
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