Objectives of MOnetary policy
Central banks derive their objectives from their respective mandates. Monetary Policy could have either a single objective of price stability or multiple objectives of the policy. In the literature and in practice, price stability is considered as the dominant objective of monetary policy. For countries, which have adopted inflation targeting framework, price stability is the core objective. Monetary Policy refers to the use of monetary instruments under the control of the central bank to influence variables, such as interest rates, money supply and availability of credit, with a view to achieving the objectives of the policy.
Evolution of Monetary policy making in India
Monetary Policy in India has evolved from time to time. In the last three decades, key changes related to adoption of monetary targeting framework, transition to multiple indicator approach and adoption of inflation targeting. In particular, the RBI Act, 1934, was amended in May 2016 to provide a statutory basis for the implementation of the flexible inflation targeting framework. Further, the amended RBI Act, 1934, also provides for an empowered six-member Monetary Policy Committee (MPC) to be constituted by the Central Government to determine the policy interest rate required to achieve the inflation target. The amended RBI Act came into effect in June 2016.
Objective of Monetary policy in India
Post amendment of RBI Act in 2016, the objective of Monetary Policy in India can be said as twin objective – Price stability while keeping in mind objective of growth. Here Price stability means – acceptable level of inflation and Growth means- measurable growth in the form of accepted ways like GDP/GNP or NNP or any other way. Price stability is a necessary precondition to sustainable growth.
In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.
The amended RBI Act also provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once in every five years. Accordingly, the Central Government has notified in the Official Gazette 4 per cent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent. (Inflation below 2 percent is also not desirable)
How to judge the performance of the RBI?
The Central Government notified the following as factors that constitute failure to achieve the inflation target:
(a) the average inflation is more than the upper tolerance level of the inflation target for any three consecutive quarters; or
(b) the average inflation is less than the lower tolerance level for any three consecutive quarters.
Prior to the amendment in the RBI Act in May 2016, the flexible inflation targeting framework was governed by an Agreement on Monetary Policy Framework between the Government and the Reserve Bank of India of February 20, 2015.
to read more about it, visit https://www.rbi.org.in/