The Monetary Policy Framework Agreement (MPFA) signed between the Reserve Bank of India (RBI) and the Government of India in 2015 is a crucial document that outlines the framework for monetary policy in the country. The agreement establishes inflation targeting as the statutory responsibility of the RBI and sets the groundwork for the formation of the Monetary Policy Committee (MPC).
Key Points of the Monetary Policy Framework Agreement:
- Inflation Targeting:
- The MPFA establishes inflation targeting as the primary objective of monetary policy in India.
- The RBI is tasked with maintaining inflation targets at 4 per cent, with a permissible deviation of plus or minus 2 per cent, in the medium term.
- Inflation Target Determination:
- The Central Government, in consultation with the RBI, determines the inflation target once every five years.
- The inflation target is specified in terms of the headline (unadjusted) Consumer Price Index (CPI).
- Accountability for Failure to Meet Targets:
- If the RBI fails to achieve the specified inflation targets for three consecutive quarters, it is required to submit a report to the Central Government.
- The report must include reasons for the failure, proposed remedial actions, and an estimated timeline within which the inflation target is expected to be achieved.
- Monetary Policy Report:
- The RBI is obligated to publish a Monetary Policy Report every six months.
- The report is expected to provide an explanation of the sources of inflation and forecasts of inflation for the upcoming period of six to eighteen months.
The MPFA is designed to enhance transparency, accountability, and communication in the formulation and implementation of monetary policy. By formalizing the inflation targeting framework, the agreement provides a clear roadmap for achieving price stability and supporting the overall economic objectives of the country. The establishment of the MPC, as mentioned in the MPFA, further reinforces the institutional framework for making collective and informed decisions regarding monetary policy.
FAQs
Q: What is the Monetary Policy Framework Agreement (MPFA)?
A: The Monetary Policy Framework Agreement (MPFA) is a formal agreement between a central bank and the government that outlines the objectives, tools, and communication strategies for conducting monetary policy. It serves as a framework to guide the central bank’s actions in achieving its monetary policy goals.
Q: What are the objectives of the MPFA?
A: The primary objective of the MPFA is typically to maintain price stability within the economy. This often involves targeting a specific inflation rate over the medium to long term. Additionally, the MPFA may also aim to support the broader goals of economic growth, employment, and financial stability.
Q: What tools are used under the MPFA?
A: Central banks employ a variety of tools to implement monetary policy, which may include adjusting interest rates, conducting open market operations, and employing unconventional measures such as quantitative easing. The specific tools utilized may vary depending on the economic conditions and objectives outlined in the MPFA.
Q: How does the MPFA affect the economy?
A: The MPFA influences various aspects of the economy by influencing the cost and availability of credit, which in turn impacts consumption, investment, and inflation. By maintaining price stability and supporting economic growth, the MPFA plays a crucial role in shaping overall macroeconomic conditions.
Q: Why is transparency important in the MPFA?
A: Transparency in the MPFA is essential as it enhances the effectiveness and credibility of monetary policy. Clear communication about the central bank’s objectives, strategies, and decisions helps businesses, consumers, and financial markets make informed decisions. Moreover, transparency fosters accountability and public trust in the central bank’s actions, contributing to overall economic stability.
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