“…the primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth.”
Preamble to the Reserve Bank of India Act 1934
Under the Reserve Bank of India, Act,1934 (RBI Act,1934) (as amended in 2016), RBI is entrusted with the responsibility of conducting monetary policy in India with the primary objective of maintaining price stability while keeping in mind the objective of growth.
In May 2016, the RBI Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.
Monetary Policy Committee[Inflation Targeting]:
1. Under Section 45ZA ofthe RBI Act, 1934, the Central Government, in consultation with the RBI, determines the inflation target in terms of the Consumer Price Index (CPI), once in five years and notifies it in the Official Gazette.
2. Section 45ZB of the RBI Act 1934 provides for the constitution of a six-member Monetary Policy Committee (MPC) to determine the policy rate required to achieve the inflation target. Governor of the Reserve Bank of India—Chairperson, ex officio.
3. The MPC determines the policy repo rate required to achieve the inflation target.
4. The MPC is required to meet at least four times in a year. The quorum for the meeting of the MPC is four members.
5. Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote.
6. Each Member of the Monetary Policy Committee writes a statement specifying the reasons for voting in favour of or against the proposed resolution.
7. To ensure transparency – Govt can send messages only in writing.
Failure to Maintain Inflation Target:
The Central Government has notified the following as the factors that constitute failure to achieve the inflation target:
1. the average inflation is more than the upper tolerance level of the inflation target for any three consecutive quarters.
2. the average inflation is less than the lower tolerance level for any three consecutive quarters.