After 20 years, historic change in policy

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Governor Raghuram Rajan’s Reserve Bank of India (RBI) and the PM Narendra Modi-led Bharatiya Janata Party (BJP) government at Centre have agreed to the biggest change to monetary policy since opening up of India’s economy more than two decades ago, by introducing inflation targetting to rein in a long history of volatile price rises.

In a document dated February 20 but published on the Finance Ministry website on Monday, the two sides set a consumer inflation target of 4 per cent, with a band of plus or minus 2 percentage points, by the financial year ending in March 2017.

The Reserve Bank of India (RBI) will first aim to have consumer inflation fall below 6 per cent by January 2016.

The changes bring closer to reality a goal pursued relentlessly by RBI Governor Raghuram Rajan, who has said the inflation targeting, more commonly seen in developed economies, was also vital in India.

The RBI’s governor will determine the country’s key interest rates or any measures needed to achieve that inflation target. There was no mention in the document of a long-expected Monetary Policy Committee, though that is expected to be introduced at a later date.

POLICY DETAIL
* India’s monetary policy framework will be operated by the central bank.
* India’s monetary policy framework will aim to “maintain price stability while keeping in mind the objective of growth”.

INFLATION TARGET
* India’s central bank will aim to bring inflation below 6 percent by Jan 2016.
* Consumer inflation target for 2016/2017 and subsequent years will be 4 percent +/-2 percentage points.

COMMITTEE
* The change is expected to include the introduction of a Monetary Policy Committee, but there was no detail on that in the document released on Monday.

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