The Union Government has set an inflation target of four per cent for the next five years i.e. till March 31, 2021.
In this regard, Union Government will soon set-up Monetary Policy Committee (MPC) to adhere to the target till March 31, 2021.
- This target was fixed after the Union Government and Reserve Bank of India (RBI) had reached an agreement on a monetary policy framework.
- The framework had had set the inflation target at four per cent, plus or minus two per cent. However, there was no legal backing to it.
- The Union Government in June 2016 also had notified rules for setting up the MPC giving effect to amendments in the RBI Act.
What is Inflation targeting?
- Inflation targeting is a monetary policy in which a central bank estimates and makes public a projected or “target” inflation rate.
- After declaration of target, the central bank attempts to steer actual inflation towards the target through the use of interest rate changes and other monetary tools.
- The key advantage of a target is that it allows to recognise the short run trade-offs between inflation and growth.
- It also enables Central Bank to pursue the inflation target in the long run over the course of a business cycle.