Lok Sabha Question No. 4399 (UNSTARRED), answered on 2016-08-12
Subject: Periodic Monetary Policy
Ministry: FINANCE
Asked by: (SMT.) RATNA DE(NAG), CHANDRA PRAKASH JOSHI

## GOVERNMENT OF INDIA MINISTRY  OF FINANCE

## DEPARTMENT OF ECONOMIC AFFAIRS

## LOK SABHA

## UNSTARRED  QUESTTON NO. 4399

## To BE ANSwERED oN t2'h AUGUST 2ot6 QUESTION

## Periodic  Monetary  Policy

## 4399. DR. RATNA DE (NAG):

## SHRI CTIANDRA PRAKASH  JOSHI:

Willthe Minister of FINANCE be pleased to state:

- (a) whether the Government has introduced any changes in Periodic  Monetary Policy review System in the recent past;
- (b) if so, the details  thereof;  and
- (c) the details about the key parameter  and the impact of the above changes?

## ANSWER

## MINISTER OF STATE IN TIIE MINISTRY  OF FINANCE

## (SHRI ARJUN RAM MEGHWAL)

(a) and (b):The  Government  had announced in the Budget 2016-17 the intention  of the Government to amend the Reserve  Bank of India Act, 1934 (RBI Act) to provide for a statutory and institutionalised framework for a Monetary Policy  Committee  (MPC).  The Preamble in the RBI Act, as amended by the Finance Act, 2016, now provides  that the primary  objective of the monetary policy is to maintain  price stability, while keeping in mind the objective  of growth,  and to meet the challenge of an increasingly  complex economy.  RBI would, accordingly, operate a Monetary Policy Framework.  Thus, now there is a statutory  basis for a Monetary Policy Framework  and the MPC. A Committee-based  approach  will add lot of value and transparency  to monetary  policy decisions.  Out of the six Members  of MPC, three Members  will be from the Reserve Bank of India (RBI), including  the Governor, RBI, who will be the ex-officio Chairperson,  the Deputy Governor, RBI and one officer of RBI. The other three Members  of MPC will be appointed by the Central Government,  on the recommendations  of a Search-cumSelection Committee.  These three Members'of MPC will be experts in the field of economics  or banking or finance or monetary policy and will be appointed for a period  of 4 years and shall not be eligible for re-appointment.  The meetings  of the MPC shall be held at least 4 times a year and it shall  publicise its decisions  after each such meeting.

(c): MPC would be entrusted  with the task of fixing the benchmark policy rate (repo rate) required to contain inflation  within the specified target level. In exercise  of the powers conferred by section  45ZA of the RBI Act, the Central Government, in consultation  with RBI, has fixed the

inflation  target for the period  beginning  from August  5, 2016 and ending on the March 37,2021, as under:

Inflation Target:

Four per cent.

Upper  tolerance

level:  Six per cent.

Lower tolerance level: Two per cent.

The key advantage of a range around a target is that it allows MPC to recognise  the short run trade-offs be$reen  inflation and growth but enables  it to pursue the inflation target in long run overthe course of business cycle. The range also accommodates  data limitations, projection errors, short-run supply  gaps and instability  in the agriculture  production, an important  factor  for CPI inflation, as food articles have a major weight in the CPI indices. It also allows to accommodate  unanticipated short-term  shocks  even while nudging public inflation expectations on the centre of the range, to which the monetary policy will return the economy over the medium term, leading to transparency  and predictability.

Further,  if the average inflation is more than the upper  tolerance  level of 4yo + 2o/o, that is,60/o, or less than the lower  tolerance level of 4%  -2'/o,  that is, ZYq for any three consecutive quarters, it would mean a failure to achieve the inflation target. Where RBI fails to meet the inflation target, in terms of the provisions of RBI Act, it shall set out a report to the Central Government stating the reasons for failure to achieve the inflation target;  remedial  actions proposed to be taken  by RBI; and an estimate  of the time-period within which the inflation target shall  be achieved  pursuantto timely implementat.ion  of proposed  remedial actions.

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