Monetary Policy Framework Agreement.
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.
